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arXiv · 1512.02529

High-order ADI scheme for option pricing in stochastic volatility models

Bertram Düring·James Miles
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Abstract

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.

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BibTeXRIS

Bertram Düring, James Miles. 2015-12-08. High-order ADI scheme for option pricing in stochastic volatility models. https://doi.org/10.1016/j.cam.2016.09.040

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