BulDML at Institute of Mathematics and Informatics >
IMI Periodicals >
Serdica Mathematical Journal >
2010 >
Volume 36, Number 3 >

Please use this identifier to cite or link to this item:

Title: Low Volatility Options and Numerical Diffusion of Finite Difference Schemes
Authors: Milev, Mariyan
Tagliani, Aldo
Keywords: Numerical Diffusion
Spurious Oscillations
Black-Scholes Equation
Low Volatility Options
Finite Difference Schemes
Non-Smooth Initial Conditions
Issue Date: 2010
Publisher: Institute of Mathematics and Informatics Bulgarian Academy of Sciences
Citation: Serdica Mathematical Journal, Vol. 35, No 3, (2010), 223p-236p
Abstract: In this paper we explore the numerical diffusion introduced by two nonstandard finite difference schemes applied to the Black-Scholes partial differential equation for pricing discontinuous payoff and low volatility options. Discontinuities in the initial conditions require applying nonstandard non-oscillating finite difference schemes such as the exponentially fitted finite difference schemes suggested by D. Duffy and the Crank-Nicolson variant scheme of Milev-Tagliani. We present a short survey of these two schemes, investigate the origin of the respective artificial numerical diffusion and demonstrate how it could be diminished.
Description: 2000 Mathematics Subject Classification: 65M06, 65M12.
ISSN: 1310-6600
Appears in Collections:Volume 36, Number 3

Files in This Item:

File Description SizeFormat
2010-223-236.pdf584.46 kBAdobe PDFView/Open


Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.


Valid XHTML 1.0!   Creative Commons License