Positive numerical splitting method for the Hull and White 2D Black–Scholes equation |
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Authors: | Tatiana Chernogorova Radoslav Valkov |
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Institution: | 1. Faculty of Mathematics and Informatics, University of Sofia, 1164 Sofia, Bulgaria;2. Department of Mathematics and Computer Science, University of Antwerp, 2020 Antwerp, Belgium |
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Abstract: | We consider the locally one‐dimensional backward Euler splitting method to solve numerically the Hull and White problem for pricing European options with stochastic volatility in the presence of a mixed derivative term. We prove the first‐order convergence of the time‐splitting. The parabolic equation degenerates on the boundary x = 0 and we apply a fitted finite volume scheme to the equation to resolve the degeneracy and derive the fully discrete problem as we also investigate the discrete maximum principle. Numerical experiments illustrate the efficiency of our difference scheme. © 2014 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq 31: 822–846, 2015 |
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Keywords: | boundary corrections fitted finite volume method Hull and White maximum principle mixed derivative operator splitting |
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