High-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids

Bertram D\"uring, Michel Fourni\'e and Christof Heuer
Authors registered in the RePEc Author Service: Bertram Düring

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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.

Date: 2014-04
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Citations: View citations in EconPapers (10)

Published in J. Comput. Appl. Math. 271 (2014), 247-266

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