High-order ADI scheme for option pricing in stochastic volatility models

Bertram D\"uring and James Miles
Authors registered in the RePEc Author Service: Bertram Düring

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Abstract: We propose a new high-order alternating direction implicit (ADI) finite difference scheme for the solution of initial-boundary value problems of convection-diffusion type with mixed derivatives and non-constant coefficients, as they arise from stochastic volatility models in option pricing. Our approach combines different high-order spatial discretisations with Hundsdorfer and Verwer's ADI time-stepping method, to obtain an efficient method which is fourth-order accurate in space and second-order accurate in time. Numerical experiments for the European put option pricing problem using Heston's stochastic volatility model confirm the high-order convergence.

Date: 2015-12
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Published in J. Comput. Appl. Math. 316 (2017), 109-121

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1512.02529

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