Stability of central finite difference schemes for the Heston PDE

DOI10.1007/S11075-011-9514-1zbMATH Open1245.65118arXiv1011.6532OpenAlexW2092640538MaRDI QIDQ415346FDOQ415346

Karel J. in 't Hout, Kim Volders

Publication date: 8 May 2012

Published in: Numerical Algorithms (Search for Journal in Brave)

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.

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)

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Cited In (3)

• 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

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