Applying the Model Order Reduction method to a European option pricing model

Shao-Bin Lin and Chun-Da Chen

Economic Modelling, 2013, vol. 33, issue C, 533-536

Abstract: This paper presents a European option pricing model by applying the Model-Order-Reduction (MOR) method. A European option pricing theorem based on Black–Scholes' equation is implemented by the Finite-Difference Method (FDM). However, the numerical models generated by the FDM could be simplified through the MOR technique, which is based on the concept of an Arnoldi-based Model-Order Reduction algorithm. In terms of computational cost, the MOR models are at least 2 orders of magnitude faster than the original FDM models with a negligible compromise in accuracy.

Keywords: European options; Model-Order-Reduction; Dynamical systems; Numerical linear algebra (search for similar items in EconPapers)
JEL-codes: C02 C63 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:33:y:2013:i:c:p:533-536

DOI: 10.1016/j.econmod.2013.03.014

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