High-Order ADI Scheme for Option Pricing in Stochastic Volatility Models

Download or read book High-Order ADI Scheme for Option Pricing in Stochastic Volatility Models written by Bertram Düring and published by . This book was released on 2015 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new high-order alternating direction implicit (ADI) finite difference scheme for the solution of initial-boundary value problems of convection-diffusion type with mixed derivatives and non-constant coefficients, as they arise from stochastic volatility models in option pricing. Our approach combines different high-order spatial discretisations with Hundsdorfer and Verwer's ADI time-stepping method, to obtain an efficient method which is fourth-order accurate in space and second-order accurate in time. Numerical experiments for the European put option pricing problem using Heston's stochastic volatility model confirm the high-order convergence.