A New Stable Local Radial Basis Function Approach for Option Pricing

A. Golbabai () and E. Mohebianfar ()
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A. Golbabai: Iran University of Science & Technology
E. Mohebianfar: Iran University of Science & Technology

Computational Economics, 2017, vol. 49, issue 2, No 4, 288 pages

Abstract: Abstract In this paper, we develop a new local meshless approach based on radial basis functions (RBFs) to solve the Black–Scholes equation. The global RBF approximations derived from conventional global collocation method usually lead to ill-conditioned matrices. The new scheme employs the idea of the finite difference method to localize them. It removes the difficulty of ill-conditioning of the original method. The new proposed approach is unconditionally stable as it is shown by Von-Neumann stability analysis. As well as it is fast and it produces accurate results as shown in numerical experiments.

Keywords: Local meshless method; Radial basis function; Black–Scholes equation; Unconditional stability (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10614-016-9561-8

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