Finite volume difference scheme for a degenerate parabolic equation in the zero-coupon bond pricing

DOI10.1016/J.MCM.2011.06.049zbMATH Open1235.65114arXiv1307.0235OpenAlexW2035935172MaRDI QIDQ409974FDOQ409974

Authors: T. Chernogorova, R. Valkov 

Publication date: 15 April 2012

Published in: Mathematical and Computer Modelling (Search for Journal in Brave)

Abstract: In this paper we solve numerically a degenerate parabolic equation with dynamical boundary conditions of zero-coupon bond pricing. First, we discuss some properties of the differential equation. Then, starting from the divergent form of the equation we implement the finite-volume method of S. Wang [16] to discretize the differential problem. We show that the system matrix of the discretization scheme is a M-matrix, so that the discretization is monotone. This provides the non-negativity of the price with respect to time if the initial distribution is nonnegative. Numerical experiments demonstrate the efficiency of our difference scheme near the ends of the interval where the degeneration occurs.

Full work available at URL: https://arxiv.org/abs/1307.0235

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zbMATH Keywords

degenerate parabolic equationdifference schemeM-matrixfinite volumezero-coupon pricing

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Finite volume methods for initial value and initial-boundary value problems involving PDEs (65M08)

Cites Work

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Cited In (18)

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• Analysis and computation of an optimality equation arising in an impulse control problem with discrete and costly observations
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• Fitted finite volume positive difference scheme for a stationary model of air pollution
• PDE models for the pricing of a defaultable coupon-bearing bond under an extended JDCEV model
• A second-order positivity preserving numerical method for gamma equation
• Analysis of a finite volume element method for a degenerate parabolic equation in the zero-coupon bond pricing
• Convergence of a finite volume element method for a generalized Black-Scholes equation transformed on finite interval
• Dependence on the reaction in porous convection
• Positivity-preserving finite volume difference schemes for atmospheric dispersion models with degenerate vertical diffusion
• Valuation of European Options with Liquidity Shocks Switching by Fitted Finite Volume Method

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