HIGH ORDER SPLITTING METHODS FOR FORWARD PDEs AND PIDEs

Itkin, Andrey

HIGH ORDER SPLITTING METHODS FOR FORWARD PDEs AND PIDEs

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 05, 1-24

Abstract: This paper is dedicated to the construction of high order (in both space and time) finite-difference schemes for both forward and backward PDEs and PIDEs, such that option prices obtained by solving both the forward and backward equations are consistent. This approach is partly inspired by Andreassen & Huge (2011) who reported a pair of consistent finite-difference schemes of first-order approximation in time for an uncorrelated local stochastic volatility (LSV) model. We extend their approach by constructing schemes that are second-order in both space and time and that apply to models with jumps and discrete dividends. Taking correlation into account in our approach is also not an issue.

Keywords: Forward Kolmogorov equation; high order splitting scheme; PDE; PIDE; finite-difference (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Working Paper: High-Order Splitting Methods for Forward PDEs and PIDEs (2014)
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DOI: 10.1142/S0219024915500314

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