Numerical methods applied to option pricing models with transaction costs and stochastic volatility

Abstract

In this paper, we solve a complex partial differential equation motivated by applications in finance where the solution of the system gives the price of European options, including transaction costs and stochastic volatility. The model is based on theoretical analysis, and the resulting differential equation is solved using PDE2D software. The stability analysis agrees well with experimental results.

Keywords:

• Numerical algorithms
• Nonlinear partial differential equations
• Option pricing

JEL Classification:

• C02
• C15
• C51

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

Indranil SenGupta was partially supported by ND EPSCoR and NSF [grant number EPS-0814442].