High-order compact finite difference scheme for option pricing in stochastic volatility models

Abstract

We derive a new high-order compact finite difference scheme for option pricing in stochastic volatility models. The scheme is fourth-order accurate in space and second-order accurate in time. Under some restrictions, theoretical results like unconditional stability in the sense of von Neumann are presented. Where the analysis becomes too involved we validate our findings by a numerical study. Numerical experiments for the European option pricing problem are presented. We observe fourth-order convergence for non-smooth payoff.

23 pages

References in corpus (2)

• Wavelet Algorithm for Circuit Simulation
• High-order ADI schemes for convection-diffusion equations with mixed derivative terms

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