Stability of central finite difference schemes for the Heston PDE

K. J. in 't Hout and K. Volders

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Abstract: This paper deals with stability in the numerical solution of the prominent Heston partial differential equation from mathematical finance. We study the well-known central second-order finite difference discretization, which leads to large semi-discrete systems with non-normal matrices A. By employing the logarithmic spectral norm we prove practical, rigorous stability bounds. Our theoretical stability results are illustrated by ample numerical experiments.

Date: 2010-11
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Published in Numer. Algor. 60, 115-133 (2012)

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