Using kernel-based collocation methods to solve a delay partial differential equation with application to finance

DOI10.1504/IJCSM.2019.097637MaRDI QIDQ2224341zbMATH OpenOpenAlexWikidataFDO

Authors Mojtaba Moradipour, Hossein Azari

Publication date 3 February 2021

Published in International Journal of Computing Science and Mathematics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1504/ijcsm.2019.097637

zbMATH Keywords

collocation methodsjump diffusion modelsmesh free methodsoption pricingpositive definite kernels

Mathematics Subject Classification ID

Spectral, collocation and related methods for initial value and initial-boundary value problems involving PDEs (65M70) Numerical methods (including Monte Carlo methods) (91G60)

Review text

Summary: We consider a delay partial differential equation arising in a jump diffusion model of option pricing. Under the mean-reverting jump-diffusion model, the price of options on electricity satisfies a second order partial differential equation. In this paper, we use positive definite kernels to discretise the PDE in spatial direction and achieve a linear system of first order differential equation with respect to time. We impose homogenous boundary conditions of the PDE by using a manipulated version of kernels called `recursive kernels'. The proposed methods are fast and accurate with low computational complexity. No integrations are necessary and the time dependent system of differential equations can be solving analytically. Illustrative example is included to demonstrate the validity and applicability of the new techniques.

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Cited in

(4)

• Numerical methods for a partial differential equation with spatial delay arising in option pricing under hard-to-borrow model
• A trustable shape parameter in the kernel-based collocation method with application to pricing financial options
• Kernel-based collocation methods for Heath-Jarrow-Morton models with Musiela parametrization
• Canonical Euler splitting method for parabolic partial functional differential algebraic equations

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