Pricing options under the non-affine stochastic volatility models: An extension of the high-order compact numerical scheme

Guangping Shi, Xiaoxing Liu and Pan Tang

Finance Research Letters, 2016, vol. 16, issue C, 220-229

Abstract: We consider an improvement of a high-order compact finite difference scheme for option pricing in non-affine stochastic volatility models. Upon applying a proper transformation to equate the different coefficients of second-order non-cross derivatives, a high-order compact finite difference scheme is developed to solve the partial differential equation with nonlinear coefficients that the option values satisfied. Based on the local von Neumann stability analysis, a theoretical stability result is obtained under certain restrictions. Numerical experiments are presented showing the convergence and validity of the expansion methods and the important effects of the non-affine coefficient and volatility of volatility on option values.

Keywords: Non-affine stochastic volatility; Option pricing; High-order compact finite difference method; Variable mixed derivatives; Nonlinear coefficients (search for similar items in EconPapers)
JEL-codes: C02 C52 G13 G17 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:16:y:2016:i:c:p:220-229

DOI: 10.1016/j.frl.2015.12.004

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