Reduced-Order Modeling for Heston Stochastic Volatility Model

arXiv1611.06097MaRDI QIDQ6503255FDOQ6503255

Murat Uzunca, Bülent Karasözen, Sinem Kozpınar

Abstract: In this paper we compare two model order reduction techniques, the Proper Orthogonal Decomposition (POD) and Dynamic Mode Decomposition (DMD), for Heston's option pricing model. The full order model is obtained by discontinuous Galerkin discretization in space and backward Euler in time. Numerical results for butterfly spread, European and digital call options reveal that in general DMD requires more modes than the POD modes as expected at the same level of accuracy. However, the speed-up factors are much higher for DMD than POD due to the equation free nature of the DMD.

Mathematics Subject Classification ID

Finite element, Rayleigh-Ritz and Galerkin methods for initial value and initial-boundary value problems involving PDEs (65M60) Financial applications of other theories (91G80)

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