Ragni, Stefania (2014) Rational Krylov methods in exponential integrators for European option pricing. Numerical linear algebra with applications, Vol. 21 (4), p. 494-512. ISSN 1070-5325. eISSN 1099-1506. Article.
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The aim of this paper is to analyze efficient numerical methods for time integration of European option pricing models. When spatial discretization is adopted, the resulting problem consists of an ordinary differential equation that can be approximated by means of exponential Runge–Kutta integrators, where the matrix-valued functions are computed by the so-called shift-and-invert Krylov method. To our knowledge, the use of this numerical approach is innovative in the framework of option pricing, and it reveals to be very attractive and efficient to solve the problem at hand. In this respect, we propose some a posteriori estimates for the error in the shift-and-invert approximation of the core-functions arising in exponential integrators. The effectiveness of these error bounds is tested on several examples of interest. They can be adopted as a convenient stopping criterion for implementing the exponential Runge–Kutta algorithm in order to perform time integration.
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