Essentially high-order compact schemes with application to stochastic volatility models on non-uniform grids

Essentially high-order compact schemes with application to stochastic volatility models on non-uniform grids

We present high-order compact schemes for a linear second-order parabolic partial differential equation (PDE) with mixed second-order derivative terms in two spatial dimensions. The schemes are applied to option pricing PDE for a family of stochastic volatility models. We use a non-uniform grid with...

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Hauptverfasser: Düring, Bertram, Heuer, Christof
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Quantitative Finance - Computational Finance
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description We present high-order compact schemes for a linear second-order parabolic partial differential equation (PDE) with mixed second-order derivative terms in two spatial dimensions. The schemes are applied to option pricing PDE for a family of stochastic volatility models. We use a non-uniform grid with more grid-points around the strike price. The schemes are fourth-order accurate in space and second-order accurate in time for vanishing correlation. In our numerical convergence study we achieve fourth-order accuracy also for non-zero correlation. A combination of Crank-Nicolson and BDF-4 discretisation is applied in time. Numerical examples confirm that a standard, second-order finite difference scheme is significantly outperformed.
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title Essentially high-order compact schemes with application to stochastic volatility models on non-uniform grids
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