Numerical solution of generalized Black–Scholes model

S. Chandra Sekhara Rao and Manisha,

Applied Mathematics and Computation, 2018, vol. 321, issue C, 401-421

Abstract: This paper presents a numerical scheme that approximates the option prices for different option styles, governed by the generalized Black–Scholes equation in its degenerate form. The proposed method uses the HODIE scheme in the spacial direction and the two-step backward differentiation formula in the temporal direction. It is proved that the method has second order convergence in space as well as in time. Numerical experiments validate the theoretical results.

Keywords: Degenerate parabolic partial differential equation; Generalized Black–Scholes model; HODIE (High-order difference approximation with identity expansions) scheme; Two-step backward differentiation formula (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:321:y:2018:i:c:p:401-421

DOI: 10.1016/j.amc.2017.10.004

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