High-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids
Computational Finance
2014-05-12 v1 Numerical Analysis
Abstract
We derive high-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids. The schemes are fourth-order accurate in space and second-order accurate in time for vanishing correlation. In our numerical study we obtain high-order numerical convergence also for non-zero correlation and non-smooth payoffs which are typical in option pricing. In all numerical experiments a comparative standard second-order discretisation is significantly outperformed. We conduct a numerical stability study which indicates unconditional stability of the scheme.
Keywords
Cite
@article{arxiv.1404.5138,
title = {High-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids},
author = {Bertram Düring and Michel Fournié and Christof Heuer},
journal= {arXiv preprint arXiv:1404.5138},
year = {2014}
}
Comments
21 pages, to appear in J. Comput. Appl. Math