Options
Pricing European and American options under Heston's stochastic volatility model with accelerated explicit finite differencing methods
Alternative Title
Pricing options under Heston’s stochastic
volatility model via accelerated explicit finite
differencing methods
Author(s)
Date Issued
2010-06
Date Available
2010-11-22T12:42:30Z
Abstract
We present an acceleration technique, effective for explicit finite difference schemes
describing diffusive processes with nearly symmetric operators, called Super-Time-
Stepping (STS). The technique is applied to the two-factor problem of option pricing
under stochastic volatility. It is shown to significantly reduce the severity of the stability
constraint known as the Courant-Friedrichs-Lewy condition whilst retaining the
simplicity of the chosen underlying explicit method.
For European and American put options under Heston’s stochastic volatility model
we demonstrate degrees of acceleration over standard explicit methods sufficient to
achieve comparable, or superior, efficiencies to a benchmark implicit scheme. We conclude
that STS is a powerful tool for the numerical pricing of options and propose them
as the method-of-choice for exotic financial instruments in two and multi-factor models.
Sponsorship
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Business. Centre for Financial Markets
Series
Centre for Financial Markets working paper series
WP 10 03
Subject – LCSH
Acceleration principle (Economics)
Options (Finance)--Mathematical models
Financial instruments--Econometric models
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
File(s)
Owning collection
Views
1632
Last Month
1
1
Acquisition Date
Mar 18, 2024
Mar 18, 2024
Downloads
561
Last Week
2
2
Last Month
4
4
Acquisition Date
Mar 18, 2024
Mar 18, 2024