Stability of central finite difference schemes for the Heston PDE

DOI10.1007/S11075-011-9514-1MaRDI QIDQ415346zbMATH OpenOpenAlexFDO

Authors Karel J. in 't Hout, Kim Volders

Publication date 8 May 2012

Published in Numerical Algorithms (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1011.6532

zbMATH Keywords

stabilitynumerical experimentsfinite difference schememathematical financeadvection-diffusion equationlogarithmic normHeston equation

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Initial-boundary value problems for second-order parabolic equations (35K20) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Stability and convergence of numerical methods for initial value and initial-boundary value problems involving PDEs (65M12)

Abstract: This paper deals with stability in the numerical solution of the prominent Heston partial differential equation from mathematical finance. We study the well-known central second-order finite difference discretization, which leads to large semi-discrete systems with non-normal matrices A. By employing the logarithmic spectral norm we prove practical, rigorous stability bounds. Our theoretical stability results are illustrated by ample numerical experiments.

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Cites work

• scientific article; zbMATH DE number 1967777 (Why is no real title available?)
• scientific article; zbMATH DE number 1745051 (Why is no real title available?)
• scientific article; zbMATH DE number 2212009 (Why is no real title available?)
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• Introduction to large truncated Toeplitz matrices
• Mathematical methods for foreign exchange. A financial engineer's approach
• Numerical Methods for Ordinary Differential Equations
• Solving Ordinary Differential Equations I
• Stability of central finite difference schemes on non-uniform grids for the Black-Scholes equation
• Stochastic calculus for finance. II: Continuous-time models.

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(7)

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• A high-order finite difference method for option valuation
• Using generating functions to convert an implicit (3,3) finite difference method to an explicit form on diffusion equation with different boundary conditions
• ADI schemes for pricing American options under the Heston model
• An exploration of a balanced up-downwind scheme for solving Heston volatility model equations on variable grids
• Diamond-cell finite volume scheme for the Heston model
• Stability of central finite difference schemes on non-uniform grids for the Black-Scholes equation

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