A Contour Integral Method for the Black–Scholes and Heston Equations

DOI10.1137/090776081MaRDI QIDQ3095083zbMATHOpenAlexFDO

Authors J. A. C. Weideman, Karel J. in 't Hout

Publication date 28 October 2011

Published in SIAM Journal on Scientific Computing (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0912.0434

zbMATH Keywords

Laplace transformnumerical resultsBlack-Scholes equationmatrix exponentialadvection-diffusion equationHeston equationKrylov iterative methodfinancial option pricingnumerical contour integrationquadrature trapezoidal formula

Mathematics Subject Classification ID

Parallel numerical computation (65Y05) Numerical methods (including Monte Carlo methods) (91G60) Iterative numerical methods for linear systems (65F10) Multistep, Runge-Kutta and extrapolation methods for ordinary differential equations (65L06) Method of lines for initial value and initial-boundary value problems involving PDEs (65M20) Microeconomic theory (price theory and economic markets) (91B24) First-order hyperbolic systems (35L40)

Abstract: A contour integral method recently proposed by Weideman [IMA J. Numer. Anal., to appear] for integrating semi-discrete advection-diffusion PDEs, is extended for application to some of the important equations of mathematical finance. Using estimates for the numerical range of the spatial operator, optimal contour parameters are derived theoretically and tested numerically. Test examples presented are the Black-Scholes PDE in one space dimension and the Heston PDE in two dimensions. In the latter case efficiency is compared to ADI splitting schemes for solving this problem. In the examples it is found that the contour integral method is superior for the range of medium to high accuracy requirements. Further improvements to the current implementation of the contour integral method are suggested.

Recommendations

• The homotopy perturbation method for the Black–Scholes equation
• Contour integral method for European options with jumps
• Numerical contour integral methods for free-boundary partial differential equations arising in American volatility options pricing
• A Laplace transform finite difference method for the Black-Scholes equation
• A Lie algebraic and numerical investigation of the Black-Scholes equation with Heston volatility model
• Numerical solutions of Black-Scholes integro-differential equations with convergence analysis
• Laplace transform and finite difference methods for the Black-Scholes equation
• scientific article; zbMATH DE number 2104089
• Numerical methods for solving a Black-Scholes equation
• An accurate and efficient numerical method for Black-Scholes equations

Cited in

(22)

• A ROM-accelerated parallel-in-time preconditioner for solving all-at-once systems in unsteady convection-diffusion PDEs
• Model Order Reduction in Contour Integral Methods for Parametric PDEs
• Gauss-Hermite quadrature for the Bromwich integral
• Wider contours and adaptive contours
• Fast numerical contour integral method for fractional diffusion equations
• An efficient ETD method for pricing American options under stochastic volatility with nonsmooth payoffs
• A block Krylov subspace time-exact solution method for linear ordinary differential equation systems.
• Pseudospectral roaming contour integral methods for convection-diffusion equations
• Convergence analysis of iterative Laplace transform methods for the coupled PDEs from regime-switching option pricing
• A contour method for time-fractional PDEs and an application to fractional viscoelastic beam equations
• A fast algorithm for parabolic PDE-based inverse problems based on Laplace transforms and flexible Krylov solvers
• The homotopy perturbation method for the Black–Scholes equation
• The contour integral method for Feynman-Kac equation with two internal states
• A Lie algebraic and numerical investigation of the Black-Scholes equation with Heston volatility model
• Numerical inverse Laplace transform for convection-diffusion equations
• A robust spectral method for solving Heston's model
• On numerical contour integral method for fractional diffusion equations with variable coefficients
• Evaluation of generalized Mittag-Leffler functions on the real line
• Iterative solution of shifted positive-definite linear systems arising in a numerical method for the heat equation based on Laplace transformation and quadrature
• Contour integral solution of elliptic PDEs in cylindrical domains
• Laplace inversion for the solution of an abstract heat equation without the forward transform of the source term
• Fast Laplace transform methods for free-boundary problems of fractional diffusion equations

Describes a project that uses

Uses Software

• UMFPACK
• Eigtool

This page was built for publication: A Contour Integral Method for the Black–Scholes and Heston Equations

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q3095083)