Frontiers of Mathematics in China >
Weak Galerkin finite element method for valuation of American options
Received date: 30 May 2013
Accepted date: 29 Dec 2013
Published date: 01 Apr 2014
Copyright
We introduce a weak Galerkin finite element method for the valuation of American options governed by the Black-Scholes equation. In order to implement, we need to solve the optimal exercise boundary and then introduce an artificial boundary to make the computational domain bounded. For the optimal exercise boundary, which satisfies a nonlinear Volterra integral equation, it is resolved by a higher-order collocation method based on graded meshes. With the computed optimal exercise boundary, the front-fixing technique is employed to transform the free boundary problem to a one-dimensional parabolic problem in a half infinite area. For the other spatial domain boundary, a perfectly matched layer is used to truncate the unbounded domain and carry out the computation. Finally, the resulting initial-boundary value problems are solved by weak Galerkin finite element method, and numerical examples are provided to illustrate the efficiency of the method.
Ran ZHANG , Haiming SONG , Nana LUAN . Weak Galerkin finite element method for valuation of American options[J]. Frontiers of Mathematics in China, 2014 , 9(2) : 455 -476 . DOI: 10.1007/s11464-014-0358-6
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