Generalized Finite Integration Method with Laplace Transform for European Option Pricing under Black-Scholes and Heston Models
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
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Detail(s)
Original language | English |
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Article number | 105751 |
Journal / Publication | Engineering Analysis with Boundary Elements |
Volume | 164 |
Online published | 3 May 2024 |
Publication status | Published - Jul 2024 |
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Abstract
In this paper, we combine a recently developed Generalized Finite Integration Method (GFIM)with Laplace transform technique for pricing options under the Black Scholes model and Hestonmodel respectively. Instead of using traditional time-stepping process, we first perform Laplacetransform on the governing equation and boundary conditions to remove the temporal derivatives. The Generalized Finite Integration Method is then exploited to handle the spatial differentialoperators in the transformed space. From numerical Laplace inversion algorithm, we restore therequired time-dependent option price. For verification, several option pricing models governedby one-dimensional Black–Scholes equation and two-dimensional extended Heston equation areconstructed to demonstrate the efficiency and feasibility of the proposed approach.
Citation Format(s)
Generalized Finite Integration Method with Laplace Transform for European Option Pricing under Black-Scholes and Heston Models. / Ma, Y.; Shi, C. Z.; Hon, Y. C.
In: Engineering Analysis with Boundary Elements, Vol. 164, 105751, 07.2024.
In: Engineering Analysis with Boundary Elements, Vol. 164, 105751, 07.2024.
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review