Option Pricing under Heston Stochastic Volatility Model using Discontinuous Galerkin Finite Elements

Date

2016-09-12

Author

Karasözen, Bülent
Okur, Yeliz Yolcu

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We consider interior penalty discontinuous Galerkin finite element (dGFEM) method for variable coefficient diffusion-convection-reaction equation to discretize the Heston PDE for the numerical pricing of European options. The mixed derivatives in the cross diffusion term are handled in a natural way compared to the finite difference methods. The advantages of dGFEM space discretization and Cranck-Nicolson method with Rannacher smoothing as time integrator for Heston model with non-smooth initial and boundary conditions are illustrated in several numerical examples for European call, butterfly spread and digital options. The convection dominated Heston PDE for vanishing volatility is efficiently solved utilizing the adaptive dGFEM algorithm. Numerical experiments illustrate that dGFEM is highly accurate and very efficient for pricing financial options.

URI

https://hdl.handle.net/11511/76202

Conference Name

Vienna Congress on Mathematical Finance, (12 - 14 September 2016)

Collections

Department of Mathematics, Conference / Seminar

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Citation Formats

B. Karasözen and Y. Y. Okur, “Option Pricing under Heston Stochastic Volatility Model using Discontinuous Galerkin Finite Elements,” presented at the Vienna Congress on Mathematical Finance, (12 - 14 September 2016), Viyana, Austria, 2016, Accessed: 00, 2021. [Online]. Available: https://hdl.handle.net/11511/76202.