High-order compact finite difference scheme for option pricing in stochastic volatility models

We derive a new high-order compact finite difference scheme for option pricing in stochastic volatility models. The scheme is fourth order accurate in space and second order accurate in time. Under some restrictions, theoretical results like unconditional stability in the sense of von Neumann are presented. Where the analysis becomes too involved we validate our findings by a numerical study. Numerical experiments for the European option pricing problem are presented. We observe fourth order convergence for non-smooth payoff.     

Extrapolation methods for dynamic partial differential equations

Summary Several extrapolation procedures are presented for increasing the order of accuracy in time for evolutionary partial differential equations. These formulas are based on finite difference schemes in both the spatial and temporal directions. One of these schemes reduces to a Runge-Kutta type formula when the equations are linear. On practical grounds the methods are restricted to schemes that are fourth order in time and either second, fourth or sixth order in space. For hyperbolic problems the second order in space methods are not useful while the fourth order methods offer no advantage over the Kreiss-Oliger method unless very fine meshes are used. Advantages are first achieved using sixth order methods in space coupled with fourth order accuracy in time. The averaging procedure advocated by Gragg does not increase the efficiency of the scheme. For parabolic problems severe stability restrictions are encountered that limit the applicability to problems with large cell Reynolds number. Computational results are presented confirming the analytic discussions.This report was prepared as a result of work performed under NASA Contract No. NAS1-14101 while the author was in residence at ICASE, NASA Langley Research Center, Hampton, VA 23665, USA, and under ERDA Grant No. E(11-1)-3077-III while he was at Courant Institute of Mathematical Sciences, New York, NY 10012, USA     

Nonlinear scheme with high accuracy for nonlinear coupled parabolic-hyperbolic system

A nonlinear finite difference scheme with high accuracy is studied for a class of two-dimensional nonlinear coupled parabolic-hyperbolic system. Rigorous theoretical analysis is made for the stability and convergence properties of the scheme, which shows it is unconditionally stable and convergent with second order rate for both spatial and temporal variables. In the argument of theoretical results, difficulties arising from the nonlinearity and coupling between parabolic and hyperbolic equations are overcome, by an ingenious use of the method of energy estimation and inductive hypothesis reasoning. The reasoning method here differs from those used for linear implicit schemes, and can be widely applied to the studies of stability and convergence for a variety of nonlinear schemes for nonlinear PDE problems. Numerical tests verify the results of the theoretical analysis. Particularly it is shown that the scheme is more accurate and faster than a previous two-level nonlinear scheme with first order temporal accuracy.     

A compact local one‐dimensional scheme for solving a 3D N‐carrier system with Neumann boundary conditions

We consider a mathematical model for thermal analysis in a 3D N‐carrier system with Neumann boundary conditions, which extends the concept of the well‐known parabolic two‐step model for micro heat transfer. To solve numerically the complex system, we first reduce 3D equations in the model to a succession of 1D equations by using the local one‐dimensional (LOD) method. The obtained 1D equations are then solved using a fourth‐order compact finite difference scheme for the interior points and a second‐order combined compact finite difference scheme for the points next to the boundary, so that the Neumann boundary condition can be applied directly without discretizing. By using matrix analysis, the compact LOD scheme is shown to be unconditionally stable. The accuracy of the solution is tested using two numerical examples. Results show that the solutions obtained by the compact LOD finite difference scheme are more accurate than those obtained by a Crank‐Nicholson LOD scheme, and the convergence rate with respect to spatial variables is about 2.6. © 2009 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq 2010     

Analysis on two approaches for high order accuracy finite difference computation

We analyze two approaches for enhancing the accuracy of the standard second order finite difference schemes in solving one dimensional elliptic partial differential equations. These are the fourth order compact difference scheme and the fourth order scheme based on the Richardson extrapolation techniques. We study the truncation errors of these approaches and comment on their regularity requirements and computational costs. We present numerical experiments to demonstrate the validity of our analysis.     

Technical note: A fourth‐order finite difference scheme for a system of a 2D nonlinear elliptic partial differential equations

In this article we present a fourth‐order finite difference scheme, for a system of two‐dimensional, second‐order, nonlinear elliptic partial differential equations with mixed spatial derivative terms, using 13‐point stencils with a uniform mesh size h on a square region R subject to Dirichlet boundary conditions. The scheme of order h⁴ is derived using the local solution of the system on a single stencil. The resulting system of algebraic equations can be solved by iterative methods. The difference scheme can be easily modified to obtain formulae for grid points near the boundary. Computational results are given to demonstrate the performance of the scheme on some problems including Navier‐Stokes equations. © 2001 John Wiley & Sons, Inc. Numer Methods Partial Differential Eq 17: 43–53, 2001     

A high‐order compact boundary value method for solving one‐dimensional heat equations

We combine fourth‐order boundary value methods (BVMs) for discretizing the temporal variable with fourth‐order compact difference scheme for discretizing the spatial variable to solve one‐dimensional heat equations. This class of new compact difference schemes achieve fourth‐order accuracy in both temporal and spatial variables and are unconditionally stable due to the favorable stability property of BVMs. Numerical results are presented to demonstrate the accuracy and efficiency of the new compact difference scheme, compared to the standard second‐order Crank‐Nicolson scheme. © 2003 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq 19: 846–857, 2003.     

求解对流扩散方程的一致四阶紧致格式

目前,许多高精度差分格式,由于未成功地构造与其精度匹配的稳定的边界格式,不得不采用低精度的边界格式.本文针对对流扩散方程证明了存在一致四阶紧致格式,它的边界点的计算格式和内点的计算格式的截断误差主项保持一致,给出了具体内点和边界格式;并分析了此半离散格式的渐近稳定性.数值结果表明该格式是四阶精度;在对流占优情况下,本文边界格式的数值结果比四阶精度的显式差分格式的的数值结果的数值振荡小,取得了不错的效果,理论结果得到了数值验证;驱动方腔数值结果显示,本文对N-S方程的离散格式具有很好的可靠性,适合对复杂流体流动的数值模拟和研究.     

A high-order and fast scheme with variable time steps for the time-fractional Black-Scholes equation

In this paper, a high-order and fast numerical method is investigated for the time-fractional Black-Scholes equation. In order to deal with the typical weak initial singularity of the solution, we construct a finite difference scheme with variable time steps, where the fractional derivative is approximated by the nonuniform Alikhanov formula and the sum-of-exponentials (SOE) technique. In the spatial direction, an average approximation with fourth-order accuracy is employed. The stability and the convergence with second order in time and fourth order in space of the proposed scheme are religiously derived by the energy method. Numerical examples are given to demonstrate the theoretical statement.     

Numerical performance of parallel group explicit solvers for the solution of fourth order elliptic equations

Many applications in applied mathematics and engineering involve numerical solutions of partial differential equations (PDEs). Various discretisation procedures such as the finite difference method result in a problem of solving large, sparse systems of linear equations. In this paper, a group iterative numerical scheme based on the rotated (skewed) five-point finite difference discretisation is proposed for the solution of a fourth order elliptic PDE which represents physical situations in fluid mechanics and elasticity. The rotated approximation formulas lead to schemes with lower computational complexities compared to the centred approximation formulas since the iterative procedure need only involve nodes on half of the total grid points in the solution domain. We describe the development of the parallel group iterative scheme on a cluster of distributed memory parallel computer using Message-Passing Interface (MPI) programming environment. A comparative study with another group iterative scheme derived from the centred difference formula is also presented. A detailed performance analysis of the parallel implementations of both group methods will be reported and discussed.     

两点混合边值问题的紧有限体积格式

本文针对常系数和变系数两点混合边值问题提出一种紧有限体积格式,该格式形成的线性代数方程组具有三对角性质,可以使用追赶法求解.证明格式按照H1半范数具有四阶收敛精度.利用节点计算值,给出单元中点值和一阶导数值的高精度后处理计算公式,这两个公式同样具有四阶精度.数值算例验证了理论分析的正确性,并说明了格式的有效性.     

Global Homotopy Formulas on <Emphasis Type="Italic">q</Emphasis>-Concave <Emphasis Type="Italic">CR</Emphasis> Manifolds for Large Degrees

Using functional analysis and a Friedrichs approximation lemma for first order differential operators, we derive a global homotopy formula in large degrees for the tangential Cauchy-Riemann operator from local homotopy formulas without loss of regularity.     

Polynomial spline approach for solving second-order boundary-value problems with Neumann conditions

In this paper, a new difference scheme based on quartic splines is derived for solving linear and nonlinear second-order ordinary differential equations subject to Neumann-type boundary conditions. The scheme can achieve sixth order accuracy at the interior nodal points and fourth order accuracy at and near the boundary, which is superior to the well-known Numerov’s scheme with the accuracy being fourth order. Convergence analysis of the present method for linear cases is discussed. Finally, numerical results for both linear and nonlinear cases are given to illustrate the efficiency of our method.     

基于不光滑边界的变系数抛物型方程的高精度紧格式

本文讨论基于不光滑边界的变系数抛物型方程求解的高精度紧格式.首先构造一般变系数抛物型方程的高精度紧格式,并在理论上证明格式具有空间方向四阶精度.然后针对非光滑边界条件,引入局部网格加密技巧在奇异点附近进行不均匀的网格加密.数值实验以期权定价中Black-Scholes偏微分方程的求解为例,验证高精度紧格式用于光滑边界条件的微分方程离散可以达到四阶精度.对于处理非光滑边界条件,网格局部加密技巧能有效的提高数值解精度,使得高精度紧格式用于定价欧式期权可以接近四阶精度.     

An IMEX‐BDF2 compact scheme for pricing options under regime‐switching jump‐diffusion models

In this paper, an implicit‐explicit two‐step backward differentiation formula (IMEX‐BDF2) together with finite difference compact scheme is developed for the numerical pricing of European and American options whose asset price dynamics follow the regime‐switching jump‐diffusion process. It is shown that IMEX‐BDF2 method for solving this system of coupled partial integro‐differential equations is stable with the second‐order accuracy in time. On the basis of IMEX‐BDF2 time semi‐discrete method, we derive a fourth‐order compact (FOC) finite difference scheme for spatial discretization. Since the payoff function of the option at the strike price is not differentiable, the results show only second‐order accuracy in space. To remedy this, a local mesh refinement strategy is used near the strike price so that the accuracy achieves fourth order. Numerical results illustrate the effectiveness of the proposed method for European and American options under regime‐switching jump‐diffusion models.     

Fourth Order Symmetric Finite Difference Schemes for the Acoustic Wave Equation

We present an explicit, symmetric finite difference scheme for the acoustic wave equation on a rectangle with Neumann and/or Dirichlet boundary conditions. The scheme is fourth order accurate both in time and space. It is obtained by mass lumping of a finite element scheme. The accuracy and the difference approximations at the boundary are analyzed in terms of local and global errors. AMS subject classification (2000) 65M10     

High order compact Alternating Direction Implicit method for the generalized sine-Gordon equation

High order compact Alternating Direction Implicit scheme is given for solving the generalized sine-Gordon equation in a two-dimensional rectangular domain. We apply the compact finite difference operators to obtain a fourth order discretization for the second order space derivatives, and we give a linearized three time level algorithm for solving the original nonlinear equation. Error estimate is given by the energy method. Numerical results are provided to verify the accuracy and efficiency of this algorithm.     

High‐order difference schemes for 2D elliptic and parabolic problems with mixed derivatives

We propose a 9‐point fourth‐order finite difference scheme for 2D elliptic problems with a mixed derivative and variable coefficients. The same approach is extended to derive a class of two‐level high‐order compact schemes with weighted time discretization for solving 2D parabolic problems with a mixed derivative. The schemes are fourth‐order accurate in space and second‐ or lower‐order accurate in time depending on the choice of a weighted average parameter μ. Unconditional stability is proved for 0.5 ≤ μ ≤ 1, and numerical experiments supporting our theoretical analysis and confirming the high‐order accuracy of the schemes are presented. © 2006 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq 23: 366–378, 2007     

Sinc Sum Function and Its Application on FIR Filter Design

A new function is found and is defined as sinc sum function by the author. It has outstanding properties of stairs shape, global symmetry, local symmetry, derivative formula simplicity, local extreme certainty, oscillation regularity, extreme value stability, etc. These properties are proved. Geometry meaning is explained. As an application of the function, the author has developed a new method to design FIR digital filters with adjustable weights. Filter formula in time domain is the weighted sum of sub-filters. A novel form of frequency response expression is deduced which is the sum of sinc sum functions. One of the remarkable characteristics of the form is that weights of sub-filters can be directly calculated according to the expression. Completing the calculation of the weights means finishing the design of a filter. The weights can be either adjustable or fixed. A method to determine the weights are given. Three examples using the method are selected for the consideration that the new method can be easily compared with some famous window methods. Three new filter formulas are produced. Much better performances can be obtained using these formulas compared with using Hanning window and Blackman window respectively. And the performance designing with the new method is slightly better than that with Hamming window. For fixed weights it is almost as easy as using fixed window to calculate filter coefficients.     

On variations in the solutions of integro-differential equations of mixed problems of elasticity theory for domain variations

The behaviour of the solution of the boundary value problem for a pseudodifferential equation (PDE), Green's function of this problem, and also some of their local and global characteristics, during variation of the domain is investigated. Formulas are proposed that enable the solution of a broad class of PDE in a domain to be expressed in terms of the solution in the near domain. Local characteristics of the solution are expressed in terms of the local characteristics of the solution in the near domain. A double asymptotic form of Green's function for both arguments tending to the domain boundary occurs in the variation formula. The variation of this double asymptotic form as the domain varies is expressed in terms of this same asymptotic form. The system of variation formulas obtained is closed. It enables the PDE solution in the domain to be reduced to the solution of an ordinary differential equation in functional space. The local characteristics of the solution can also be found by this method without calculating the solution itself. If there is sufficient symmetry in the initial operator, then conservation laws in the Noether sense are obtained for its Green's function and its asymptotic form. The behaviour of the quantities under investigation is studied under inversion.

The investigation of variations of the solutions of problems for the variation of the domain occurs in the paper by Hadamard /1/, who studied the variation in conformal mapping and obtained a formula similar to (1.4). The formula for the variation of the solution of the boundary value problem for an elliptic differential equation is obtained in /2/. Variation formulas for the case of the operator of the problem about a crack and a circular domain are obtained in /3, 4/. The Irwin formula /5/ is obtained from formulas (1.4) and (1.21) by substitution.