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.
Low volatility options and numerical diffusion of finite difference schemes / M., Milev; Tagliani, Aldo. - In: SERDICA MATHEMATICAL JOURNAL. - ISSN 1310-6600. - ELETTRONICO. - 2010, vol.36:3(2010), pp. 223-236.
Titolo: | Low volatility options and numerical diffusion of finite difference schemes | |
Autori: | M., Milev; Tagliani, Aldo | |
Autori Unitn: | ||
Titolo del periodico: | SERDICA MATHEMATICAL JOURNAL | |
Anno di pubblicazione: | 2010 | |
Numero e parte del fascicolo: | 3 | |
Handle: | http://hdl.handle.net/11572/85854 | |
Citazione: | Low volatility options and numerical diffusion of finite difference schemes / M., Milev; Tagliani, Aldo. - In: SERDICA MATHEMATICAL JOURNAL. - ISSN 1310-6600. - ELETTRONICO. - 2010, vol.36:3(2010), pp. 223-236. | |
Appare nelle tipologie: | 03.1 Articolo su rivista (Journal article) |
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