Optimal non-uniform finite difference grids for the Black–Scholes equations

Jisang Lyu, Eunchae Park, Sangkwon Kim, Wonjin Lee, Chaeyoung Lee, Sungha Yoon, Jintae Park and Junseok Kim

Mathematics and Computers in Simulation (MATCOM), 2021, vol. 182, issue C, 690-704

Abstract: In this article, we present optimal non-uniform finite difference grids for the Black–Scholes (BS) equation. The finite difference method is mainly used using a uniform mesh, and it takes considerable time to price several options under the BS equation. The higher the dimension is, the worse the problem becomes. In our proposed method, we obtain an optimal non-uniform grid from a uniform grid by repeatedly removing a grid point having a minimum error based on the numerical solution on the grid including that point. We perform several numerical tests with one-, two- and three-dimensional BS equations. Computational tests are conducted for both cash-or-nothing and equity-linked security (ELS) options. The optimal non-uniform grid is especially useful in the three-dimensional case because the option prices can be efficiently computed with a small number of grid points.

Keywords: Black–Scholes equations; Optimal non-uniform grid; Finite difference method; Equity-linked securities (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:182:y:2021:i:c:p:690-704

DOI: 10.1016/j.matcom.2020.12.002

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