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


Ozer H. Ü. , Duran A.

INTERNATIONAL JOURNAL OF FINANCIAL ENGINEERING, cilt.5, 2018 (ESCI İndekslerine Giren Dergi)

  • Cilt numarası: 5 Konu: 3
  • Basım Tarihi: 2018
  • Doi Numarası: 10.1142/s2424786318500287
  • Dergi Adı: INTERNATIONAL JOURNAL OF FINANCIAL ENGINEERING

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.