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

DOI10.1016/J.MCM.2011.06.049MaRDI QIDQ409974zbMATH OpenOpenAlexFDO

Authors T. Chernogorova, R. Valkov

Publication date 15 April 2012

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

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

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)

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.

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Cites work

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• Computational Methods for Option Pricing
• On the singular limit of solutions to the Cox-Ingersoll-Ross interest rate model with stochastic volatility
• Robust Numerical Methods for Singularly Perturbed Differential Equations
• The pricing of options and corporate liabilities
• Tools for computational finance

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• Recent advances in numerical solution of HJB equations arising in option pricing
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• A computational scheme for a problem in the zero-coupon bond pricing
• Fitted finite volume positive difference scheme for a stationary model of air pollution
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• Numerical methods to simulate moisture dynamics in fibrous sheet
• Convergence of a finite volume element method for a generalized Black-Scholes equation transformed on finite interval
• Dependence on the reaction in porous convection
• Positive numerical splitting method for the Hull and White 2D Black-Scholes equation
• A second-order positivity preserving numerical method for gamma equation

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