Numerical convergence properties of option pricing PDEs with uncertain volatility

The pricing equations derived from uncertain volatility modelsin finance are often cast in the form of nonlinear partial differentialequations. Implicit timestepping leads to a set of nonlinearalgebraic equations which must be solved at each timestep. Tosolve these equations, an iterative approach is employed. Inthis paper, we prove the convergence of a particular iterativescheme for one factor uncertain volatility models. We also demonstratehow non-monotone discretization schemes (such as standard Crank–Nicolsontimestepping) can converge to incorrect solutions, or lead toinstability. Numerical examples are provided.