An Efficient Method for Option Pricing with Finite Elements: An Endogenous Element Length Approach

Tomoya Horiuchi (), Kei Takahashi () and Takahiro Ohno ()
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Tomoya Horiuchi: Graduate School of Waseda University
Kei Takahashi: School of Science and Engineering, Waseda University
Takahiro Ohno: School of Science and Engineering, Waseda University

A chapter in Operations Research Proceedings 2012, 2014, pp 203-208 from Springer

Abstract: Abstract This paper proposes an efficient version of the finite element method (FEM) in option pricing. In this study, we determine element lengths from the curvature of the PDE endogenously. Our method consists of two algorithms, the coarsening and the refinement of the elements. The model makes the element larger if the curvature of the local domain is low, and smaller if it is high at each time step. We apply this approach to one-dimensional options, a European up-and-out call option, and an American put option. As a result, we find that this method is able to reduce the experiment time while the accuracy remains at a comparable level.

Keywords: Finite Element Method; Option Price; Call Option; Finite Difference Method; Discretization Error (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:oprchp:978-3-319-00795-3_30

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DOI: 10.1007/978-3-319-00795-3_30

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