Matrix-based numerical modelling of financial differential equations

DOI10.1504/IJMMNO.2009.030089MaRDI QIDQ2655890zbMATH OpenFDO

Authors Juho Kanniainen, Robert Piché

Publication date 26 January 2010

Published in International Journal of Mathematical Modelling and Numerical Optimisation (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1504/IJMMNO.2009.030089

zbMATH Keywords

American optionsChebyshev spectral collocationdifferentiation matrixfinite differencemethod of linesoptimal shutdownoption pricingRunge-Kutta

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60)

Review text

Summary: Differentiation matrices provide a compact and unified formulation for a variety of differential equation discretization and time stepping algorithms. This paper illustrates their use for solving three differential equations of finance: the classic Black-Scholes equation (linear initial-boundary value problem), American option pricing problem (linear complementarity problem), and an optimal maintenance and shutdown model (non-linear boundary value problem with free boundary). We present numerical results that show the advantage of an L-stable time-stepping method over the Crank-Nicolson method, and results that show how spectral collocation methods are superior for boundary value problems with smooth solutions, while finite difference methods are superior for option-pricing problems.

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(10)

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• NUMERICAL SOLUTION OF TWO-FACTOR MODELS FOR VALUATION OF FINANCIAL DERIVATIVES
• A simple equation solver and its application to financial modelling
• scientific article; zbMATH DE number 5010400 (Why is no real title available?)
• Financial Applications of Symbolically Generated Compact Finite Difference Formulae
• Capillary processes increase salt precipitation during CO\(_2\) injection in saline formations
• From arteries to boreholes: transient response of a poroelastic cylinder to fluid injection
• Comparing algebraic and numerical solutions of classical diffusion process equations in computational financial mathematics
• An analytical investigation into solute transport and sorption via intra-particle diffusion in the dual-porosity limit

Describes a project that uses

Uses Software

• Differentiation Matrix Suite

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