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Radial Basis Functions with Partition of Unity Method for American Options with Stochastic Volatility Public Deposited

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https://ir.library.oregonstate.edu/concern/articles/vx021m22x

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  • In this article, we price American options under Heston's stochastic volatility model using a radial basis function (RBF) with partition of unity method (PUM) applied to a linear complementary formulation of the free boundary partial differential equation problem. RBF-PUMs are local meshfree methods that are accurate and flexible with respect to the problem geometry and that produce algebraic problems with sparse matrices which have a moderate condition number. Next, a Crank-Nicolson time discretisation is combined with the operator splitting method to get a fully discrete problem. To better control the computational cost and the accuracy, adaptivity is used in the spatial discretisation. Numerical experiments illustrate the accuracy and efficiency of the proposed algorithm.
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  • 53
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  • 0927-7099

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