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

Autores UPV
Año
Revista Abstract and Applied Analysis

Abstract

This paper deals with the numerical solution of option pricing stochastic volatility model described by a time-dependent, twodimensional convection-diffusion reaction equation. Firstly, the mixed spatial derivative of the partial differential equation (PDE) is removed bymeans 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.