ADI finite difference schemes for the Heston-Hull-White PDE

Tinne Haentjens and Karel J. in 't Hout

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Abstract: In this paper we investigate the effectiveness of Alternating Direction Implicit (ADI) time discretization schemes in the numerical solution of the three-dimensional Heston-Hull-White partial differential equation, which is semidiscretized by applying finite difference schemes on nonuniform spatial grids. We consider the Heston-Hull-White model with arbitrary correlation factors, with time-dependent mean-reversion levels, with short and long maturities, for cases where the Feller condition is satisfied and for cases where it is not. In addition, both European-style call options and up-and-out call options are considered. It is shown through extensive tests that ADI schemes, with a proper choice of their parameters, perform very well in all situations - in terms of stability, accuracy and efficiency.

Date: 2011-11
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Published in The Journal of Computational Finance 16, 83-110 (2012)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1111.4087

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