Abstract and Applied Analysis

Removing the Correlation Term in Option Pricing Heston Model: Numerical Analysis and Computing

R. Company, L. Jódar, M. Fakharany, and M.-C. Casabán

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Abstract

This paper deals with the numerical solution of option pricing stochastic volatility model described by a time-dependent, two-dimensional convection-diffusion reaction equation. Firstly, the mixed spatial derivative of the partial differential equation (PDE) is removed by means of the classical technique for reduction of second-order linear partial differential equations to canonical form. An explicit difference scheme with positive coefficients and only five-point computational stencil is constructed. The boundary conditions are adapted to the boundaries of the rhomboid transformed numerical domain. Consistency of the scheme with the PDE is shown and stepsize discretization conditions in order to guarantee stability are established. Illustrative numerical examples are included.

Article information

Source
Abstr. Appl. Anal., Volume 2013 (2013), Article ID 246724, 11 pages.

Dates
First available in Project Euclid: 27 February 2014

Permanent link to this document
https://projecteuclid.org/euclid.aaa/1393511934

Digital Object Identifier
doi:10.1155/2013/246724

Mathematical Reviews number (MathSciNet)
MR3066296

Zentralblatt MATH identifier
1293.91188

Citation

Company, R.; Jódar, L.; Fakharany, M.; Casabán, M.-C. Removing the Correlation Term in Option Pricing Heston Model: Numerical Analysis and Computing. Abstr. Appl. Anal. 2013 (2013), Article ID 246724, 11 pages. doi:10.1155/2013/246724. https://projecteuclid.org/euclid.aaa/1393511934


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