A comparative analysis of local meshless formulation for multi-asset option models. (April 2016)

• Record Type: Journal Article
• Authors: Siraj-ul-Islam, ; Ahmad, Imtiaz
• Is Part Of: Engineering analysis with boundary elements. Volume 65(2016:Apr.)
• Page Start: 159
• Page End: 176
• Publication Date: 2016-04
• Subjects: Radial basis functions -- Option pricing -- Black–Scholes PDEs model -- European put option -- American put option -- Butterfly call option -- Digital call option -- Operator splitting technique; Boundary element methods -- Periodicals; Engineering mathematics -- Periodicals; Équations intégrales de frontière, Méthodes des -- Périodiques; Mathématiques de l'ingénieur -- Périodiques; Boundary element methods; Engineering mathematics; Periodicals; 620.00151
• DOI: 10.1016/j.enganabound.2015.12.020
• Languages: English
• ISSNs: 0955-7997

Abstract

Abstract: A local meshless radial basis function collocation differential quadrature (LMRBFCDQ) is proposed for the numerical solution of a single and multi-asset option pricing PDE models arising in computational finance. Spatial discretization is performed by both local and a standard global meshless collocation procedures coupled with a set of different time integrators based on the forward Euler difference formula (FEDF), the fully Implicit method (FIM), the Crank–Nicolson method (CNM), the explicit Runge–Kutta method of order two (ERK2), the Crank–Nicolson Runge–Kutta method of order two (CNRK2), the fully Implicit Runge–Kutta method of order two (IRK2), the Runge–Kutta method of order four (RK4), the Embedded Runge–Kutta method (RK23). Operator splitting techniques like the ordinary operator splitting (OOS), the Lie–Trotter splitting, the additive splitting and the Strang splitting are also tested for time integration. The proposed hybrid schemes are the amalgamation of the meshless differential quadrature procedure and the finite difference approximations. Different types of radial basis functions (RBFs) i.e. the multiquadric (MQ), the inverse quadric (IQ) and the Gaussian (GA) are utilized for the spatial discretization of the PDE models. Numerical analysis of a range of computational finance related models are shown to demonstrate accuracy, efficiency and ease of implementation of the proposed meshless-finite difference procedure.