Tampere University of Technology

TUTCRIS Research Portal

Matrix-based numerical modelling of financial differential equations

Research output: Contribution to journalArticleScientificpeer-review

Details

Original languageEnglish
Pages (from-to)88-100
JournalInternational Journal of Mathematical Modelling and Numerical Optimization
Volume1
Issue number1/2
DOIs
Publication statusPublished - 2009
Publication typeA1 Journal article-refereed

Abstract

Differentiation matrices provide a compact and unified formulation for a variety of differential equation discretisation and time-stepping algorithms. This paper illustrates their use for solving three differential equations of finance: the classic Black-Scholes equation (linear initial-boundary value problem), an American option pricing problem (linear complementarity problem), and an optimal maintenance and shutdown model (nonlinear boundary value problem with free boundary). We present numerical results that show the advantage of an L-stable time-stepping method over the Crank-Nicolson method, and results that show how spectral collocation methods are superior for boundary value problems with smooth solutions, while finite difference methods are superior for option-pricing problems.

Publication forum classification

Downloads statistics

No data available