Essentially high-order compact schemes with application to stochastic volatility models on non-uniform grids

DOI10.1007/978-3-319-61282-9_17MaRDI QIDQ4626510zbMATH OpenOpenAlexFDO

Authors Bertram Düring, Christof Heuer

Publication date 28 February 2019

Published in Novel Methods in Computational Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1611.00316

zbMATH Keywords

high-order compact schemesoption pricing PDEstochastic volatility models

Mathematics Subject Classification ID

Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We present high-order compact schemes for a linear second-order parabolic partial differential equation (PDE) with mixed second-order derivative terms in two spatial dimensions. The schemes are applied to option pricing PDE for a family of stochastic volatility models. We use a non-uniform grid with more grid-points around the strike price. The schemes are fourth-order accurate in space and second-order accurate in time for vanishing correlation. In our numerical convergence study we achieve fourth-order accuracy also for non-zero correlation. A combination of Crank-Nicolson and BDF-4 discretisation is applied in time. Numerical examples confirm that a standard, second-order finite difference scheme is significantly outperformed.

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Cites work

• High-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids
• High-order compact schemes for parabolic problems with mixed derivatives in multiple space dimensions
• Smoothing of initial data and rates of convergence for parabolic difference equations
• The Convergence Rate for Difference Approximations to General Mixed Initial-Boundary Value Problems

Cited in

(7)

• High-order compact finite difference scheme for option pricing in stochastic volatility jump models
• High-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids
• On the stability of a compact finite difference scheme for option pricing
• High-order compact schemes for parabolic problems with mixed derivatives in multiple space dimensions
• High-order compact finite difference scheme for option pricing in stochastic volatility models
• High order compact schemes for variable coefficient parabolic partial differential equations with non-smooth boundary conditions
• Numerical pricing of options using high-order compact finite difference schemes

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