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BENCHOP - SLV: the BENCHmarking project in Option Pricing - Stochastic and Local Volatility problems

von Sydow, Lina and Milovanovic, Slobodan and Larsson, Elisabeth and In t Hout, Karel and Wiktorsson, Magnus and Oosterlee, Cornelis W and Shcherbakov, Victor and Wyns, Maarten and Leitao, Alvaro and Jain, Shashi and Haentjens, Tinne and Walden, Johan (2019) BENCHOP - SLV: the BENCHmarking project in Option Pricing - Stochastic and Local Volatility problems. In: INTERNATIONAL JOURNAL OF COMPUTER MATHEMATICS, 96 (10). pp. 1910-1923.

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Official URL: https://dx.doi.org/10.1080/00207160.2018.1544368


In the recent project BENCHOP - the BENCHmarking project in Option Pricing we found that Stochastic and Local Volatility problems were particularly challenging. Here we continue the effort by introducing a set of benchmark problems for this type of problems. Eight different methods targeted for the Stochastic Differential Equation (SDE) formulation and the Partial Differential Equation (PDE) formulation of the problem, as well as Fourier methods making use of the characteristic function, were implemented to solve these problems. Comparisons are made with respect to time to reach a certain error level in the computed solution for the different methods. The implemented Fourier method was superior to all others for the two problems where it was implemented. Generally, methods targeting the PDE formulation of the problem outperformed the methods for the SDE formulation. Among the methods for the PDE formulation the ADI method stood out as the best performing one.

Item Type: Journal Article
Additional Information: copyright for this article belongs to TAYLOR & FRANCIS LTD
Keywords: Option pricing; stochastic and local volatility; numerical methods; benchmark problem; stochastic differential equation; partial differential equation; characteristic function
Department/Centre: Division of Interdisciplinary Sciences > Management Studies
Date Deposited: 18 Nov 2019 07:05
Last Modified: 18 Nov 2019 07:05
URI: http://eprints.iisc.ac.in/id/eprint/63348

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