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Solving multi-dimensional European option pricing problems by integrals of the inverse quadratic radial basis function on non-uniform meshes

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  • Liu, Tao
  • Soleymani, Fazlollah
  • Ullah, Malik Zaka

Abstract

This paper explores multi-asset options as a means to diversify portfolios, mitigating risk across various assets. We present a numerical method using radial basis function-generated finite difference solvers via integrals of the inverse quadratic kernel. Our method introduces new weights for the task we are dealing with. We derive and compute analytical solutions to approximate function derivatives on three-node stencils with non-uniform and uniform distances. Our findings highlight the convergence order of the proposed analytical weights. Numerical examples illustrate the theory.

Suggested Citation

  • Liu, Tao & Soleymani, Fazlollah & Ullah, Malik Zaka, 2024. "Solving multi-dimensional European option pricing problems by integrals of the inverse quadratic radial basis function on non-uniform meshes," Chaos, Solitons & Fractals, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:chsofr:v:185:y:2024:i:c:s0960077924007082
    DOI: 10.1016/j.chaos.2024.115156
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    References listed on IDEAS

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    1. Cavoretto, Roberto, 2022. "Adaptive LOOCV-based kernel methods for solving time-dependent BVPs," Applied Mathematics and Computation, Elsevier, vol. 429(C).
    2. Chen, Chuin-Shan & Noorizadegan, Amir & Young, D.L. & Chen, C.S., 2023. "On the selection of a better radial basis function and its shape parameter in interpolation problems," Applied Mathematics and Computation, Elsevier, vol. 442(C).
    3. Shi, Lei & Ullah, Malik Zaka & Nashine, Hemant Kumar, 2024. "On the construction of a quartically convergent method for high-dimensional Black-Scholes time-dependent PDE," Applied Mathematics and Computation, Elsevier, vol. 463(C).
    4. Milovanović, Slobodan & von Sydow, Lina, 2020. "A high order method for pricing of financial derivatives using Radial Basis Function generated Finite Differences," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 174(C), pages 205-217.
    5. Lishang Jiang, 2005. "Mathematical Modeling and Methods of Option Pricing," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 5855, February.
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    7. Soleymani, Fazlollah & Akgül, Ali, 2019. "Improved numerical solution of multi-asset option pricing problem: A localized RBF-FD approach," Chaos, Solitons & Fractals, Elsevier, vol. 119(C), pages 298-309.
    8. Wang, Jian & Wen, Shuai & Yang, Mengdie & Shao, Wei, 2022. "Practical finite difference method for solving multi-dimensional black-Scholes model in fractal market," Chaos, Solitons & Fractals, Elsevier, vol. 157(C).
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