The source of error behavior for the solution of Black-Scholes PDE by finite difference and finite element methods

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Atıf İçin Kopyala

Ozer H. Ü., Duran A.

INTERNATIONAL JOURNAL OF FINANCIAL ENGINEERING, cilt.5, sa.3, 2018 (ESCI)

• Yayın Türü: Makale / Tam Makale
• Cilt numarası: 5 Sayı: 3
• Basım Tarihi: 2018
• Doi Numarası: 10.1142/s2424786318500287
• Dergi Adı: INTERNATIONAL JOURNAL OF FINANCIAL ENGINEERING
• Derginin Tarandığı İndeksler: Emerging Sources Citation Index (ESCI)
• Yıldız Teknik Üniversitesi Adresli: Evet

Özet

Black-Scholes partial differential equation (PDE) is one of the most famous equations in mathematical finance and financial industry. In this study, numerical solution analysis is done for Black-Scholes PDE using finite element method with linear approach and finite difference methods. The numerical solutions are compared with Black-Scholes formula for option pricing. The numerical errors are determined for the finite element and finite difference applications to Black-Scholes PDE. We examine the error behavior and find the source of the corresponding errors under various market situations.