A preconditioned iterative method for coupled fractional partial differential equation in European option pricing
Abstract: Recently, regime-switching option pricing based on fractional diffusion models has been used, which explains many significant empirical facts about financial markets better. There are many methods to solve the problem, but to the best of our knowledge, effective preconditioners for the second-order schemes have not been proposed. Thus, in this article, an implicit numerical scheme is developed for a regime-switching European option pricing problem under a multi-state tempered fractional model. The scheme is proven to be unconditionally stable and converges quadratically in space and linearly in time. Besides, the resulting linear system is solved using an iterative method, and a preconditioner is proposed to accelerate the rate of convergence. The preconditioner is constructed through circulant approximations to the Toeplitz blocks due to the coefficient matrix, which is is a block matrix with Toeplitz blocks. The spectral analysis of the preconditioned matrix is given, which demonstrates that the spectrum of the preconditioned matrix is clustered around 1. Numerical examples show the efficiency of the proposed method, and an empirical study is also provided.
- Location
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Deutsche Nationalbibliothek Frankfurt am Main
- Extent
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Online-Ressource
- Language
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Englisch
- Bibliographic citation
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A preconditioned iterative method for coupled fractional partial differential equation in European option pricing ; volume:21 ; number:1 ; year:2023 ; extent:16
Open mathematics ; 21, Heft 1 (2023) (gesamt 16)
- Creator
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Wu, Shuang
Chou, Lot-Kei
Chen, Xu
Lei, Siu-Long
- DOI
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10.1515/math-2023-0169
- URN
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urn:nbn:de:101:1-2024010313025681786507
- Rights
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Open Access; Der Zugriff auf das Objekt ist unbeschränkt möglich.
- Last update
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15.08.2025, 7:35 AM CEST
Data provider
Deutsche Nationalbibliothek. If you have any questions about the object, please contact the data provider.
Associated
- Wu, Shuang
- Chou, Lot-Kei
- Chen, Xu
- Lei, Siu-Long
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