Finance and Financial Management Commons^™

On The Acceleration Of Explicit Finite Difference Methods For Option Pricing, Stephen O'Sullivan, Conall O'Sullivan

Articles

Implicit finite difference methods are conventionally preferred over their explicit counterparts for the numerical valuation of options. In large part the reason for this is a severe stability constraint known as the Courant–Friedrichs–Lewy (CFL) condition which limits the latter class’s efficiency. Implicit methods, however, are difficult to implement for all but the most simple of pricing models, whereas explicit techniques are easily adapted to complex problems. For the first time in a financial context, we present an acceleration technique, applicable to explicit finite difference schemes describing diffusive processes with symmetric evolution operators, called Super-Time-Stepping. We show that this method can …