A high accuracy numerical method and its convergence for time-fractional Black-Scholes equation governing European options (Q2301410)

The article provides a high-order numerical scheme approximating the well-known time-fractional Black-Scholes equation governing European options in one space dimension. The time-fractional derivative is defined in the Caputo sense. A collocation method based on quintic B-spline basis functions is used for space discretization and time-stepping is done using a backward Euler method. The approximation of the fractional time derivative is performed using the known method of order \(k^{2-\alpha}\), where \(\alpha\) is the order of the fractional derivative and \(k\) is the time step size. The proposed scheme is proved to be unconditionally stable. The convergence order of the obtained scheme is proved, in \(L^\infty(L^\infty)\), to be \(2-\alpha\) in time and four in space. Some numerical tests are presented to support the theoretical results.