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BENCHOP—The BENCHmarking project in Option Pricing
Uppsala University, Disciplinary Domain of Science and Technology, Mathematics and Computer Science, Department of Information Technology, Division of Scientific Computing. Uppsala University, Disciplinary Domain of Science and Technology, Mathematics and Computer Science, Department of Information Technology, Numerical Analysis.
Uppsala University, Disciplinary Domain of Science and Technology, Mathematics and Computer Science, Department of Information Technology, Division of Scientific Computing. Uppsala University, Disciplinary Domain of Science and Technology, Mathematics and Computer Science, Department of Information Technology, Numerical Analysis.
Uppsala University, Disciplinary Domain of Science and Technology, Mathematics and Computer Science, Department of Information Technology, Division of Scientific Computing. Uppsala University, Disciplinary Domain of Science and Technology, Mathematics and Computer Science, Department of Information Technology, Numerical Analysis.
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2015 (English)In: International Journal of Computer Mathematics, ISSN 0020-7160, E-ISSN 1029-0265, Vol. 92, p. 2361-2379Article in journal (Refereed) Published
Place, publisher, year, edition, pages
2015. Vol. 92, p. 2361-2379
National Category
Computational Mathematics
Identifiers
URN: urn:nbn:se:uu:diva-260897DOI: 10.1080/00207160.2015.1072172ISI: 000363753800003OAI: oai:DiVA.org:uu-260897DiVA, id: diva2:848689
Projects
eSSENCEAvailable from: 2015-09-21 Created: 2015-08-25 Last updated: 2018-08-21Bibliographically approved
In thesis
1. Radial basis function methods for pricing multi-asset options
Open this publication in new window or tab >>Radial basis function methods for pricing multi-asset options
2016 (English)Licentiate thesis, comprehensive summary (Other academic)
Abstract [en]

The price of an option can under some assumptions be determined by the solution of the Black–Scholes partial differential equation. Often options are issued on more than one asset. In this case it turns out that the option price is governed by the multi-dimensional version of the Black–Scholes equation. Options issued on a large number of underlying assets, such as index options, are of particular interest, but pricing such options is a challenge due to the "curse of dimensionality". The multi-dimensional PDE turn out to be computationally expensive to solve accurately even in quite a low number of dimensions.

In this thesis we develop a radial basis function partition of unity method for pricing multi-asset options up to moderately high dimensions. Our approach requires the use of a lower number of node points per dimension than other standard PDE methods, such as finite differences or finite elements, thanks to a high order convergence rate. Our method shows good results for both European style options and American style options, which allow early exercise. For the options which do not allow early exercise, the method exhibits an exponential convergence rate under node refinement. For options that allow early exercise the option pricing problem becomes a free boundary problem. We incorporate two different approaches for handling the free boundary into the radial basis function partition of unity method: a penalty method, which leads to a nonlinear problem, and an operator splitting method, which leads to a splitting scheme. We show that both methods allow for locally high algebraic convergence rates, but it turns out that the operator splitting method is computationally more efficient than the penalty method. The main reason is that there is no need to solve a nonlinear problem, which is the case in the penalty formulation.

Place, publisher, year, edition, pages
Uppsala University, 2016
Series
Information technology licentiate theses: Licentiate theses from the Department of Information Technology, ISSN 1404-5117 ; 2016-001
National Category
Computational Mathematics
Research subject
Scientific Computing with specialization in Numerical Analysis
Identifiers
urn:nbn:se:uu:diva-284306 (URN)
Supervisors
Projects
eSSENCE
Available from: 2016-01-08 Created: 2016-04-16 Last updated: 2017-08-31Bibliographically approved
2. Localised Radial Basis Function Methods for Partial Differential Equations
Open this publication in new window or tab >>Localised Radial Basis Function Methods for Partial Differential Equations
2018 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

Radial basis function methods exhibit several very attractive properties such as a high order convergence of the approximated solution and flexibility to the domain geometry. However the method in its classical formulation becomes impractical for problems with relatively large numbers of degrees of freedom due to the ill-conditioning and dense structure of coefficient matrix. To overcome the latter issue we employ a localisation technique, namely a partition of unity method, while the former issue was previously addressed by several authors and was of less concern in this thesis.

In this thesis we develop radial basis function partition of unity methods for partial differential equations arising in financial mathematics and glaciology. In the applications of financial mathematics we focus on pricing multi-asset equity and credit derivatives whose models involve several stochastic factors. We demonstrate that localised radial basis function methods are very effective and well-suited for financial applications thanks to the high order approximation properties that allow for the reduction of storage and computational requirements, which is crucial in multi-dimensional problems to cope with the curse of dimensionality. In the glaciology application we in the first place make use of the meshfree nature of the methods and their flexibility with respect to the irregular geometries of ice sheets and glaciers. Also, we exploit the fact that radial basis function methods are stated in strong form, which is advantageous for approximating velocity fields of non-Newtonian viscous liquids such as ice, since it allows to avoid a full coefficient matrix reassembly within the nonlinear iteration.

In addition to the applied problems we develop a least squares radial basis function partition of unity method that is robust with respect to the node layout. The method allows for scaling to problem sizes of a few hundred thousand nodes without encountering the issue of large condition numbers of the coefficient matrix. This property is enabled by the possibility to control the coefficient matrix condition number by the rate of oversampling and the mode of refinement.

Place, publisher, year, edition, pages
Uppsala: Acta Universitatis Upsaliensis, 2018. p. 54
Series
Digital Comprehensive Summaries of Uppsala Dissertations from the Faculty of Science and Technology, ISSN 1651-6214 ; 1600
Keywords
Radial basis function, Partition of unity, Computational finance, Option pricing, Credit default swap, Glaciology, Fluid dynamics, Non-Newtonian flow, Anisotropic RBF
National Category
Computational Mathematics
Research subject
Scientific Computing with specialization in Numerical Analysis
Identifiers
urn:nbn:se:uu:diva-332715 (URN)978-91-513-0157-0 (ISBN)
Public defence
2018-01-19, ITC 2446, Polacksbacken, Lägerhyddsvägen 2, Uppsala, 10:15 (English)
Opponent
Supervisors
Available from: 2017-12-14 Created: 2017-11-21 Last updated: 2018-03-08
3. Radial Basis Function generated Finite Difference Methods for Pricing of Financial Derivatives
Open this publication in new window or tab >>Radial Basis Function generated Finite Difference Methods for Pricing of Financial Derivatives
2018 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The purpose of this thesis is to present state of the art in radial basis function generated finite difference (RBF-FD) methods for pricing of financial derivatives. This work provides a detailed overview of RBF-FD properties and challenges that arise when the RBF-FD methods are used in financial applications.

Across the financial markets of the world, financial derivatives such as futures, options, and others, are traded in substantial volumes. Knowing the prices of those financial instruments at any given time is of utmost importance. Many of the theoretical pricing models for financial derivatives can be represented using multidimensional PDEs, which are in most cases analytically unsolvable.

We present RBF-FD as a recent numerical method with the potential to efficiently approximate solutions of PDEs in finance. As its name suggests, the RBF-FD method is of a finite difference (FD) type, from the radial basis function (RBF) group of methods. When used to approximate differential operators, the method is featured with a sparse differentiation matrix, and it is relatively simple to implement — like the standard FD methods. Moreover, the method is mesh-free, meaning that it does not require a structured discretization of the computational domain, and it is of a customizable order of accuracy — which are the features it inherits from the global RBF approximations.

The results in this thesis demonstrate how to successfully apply RBF-FD to different pricing problems by studying the effects of RBF shape parameters for Gaussian RBF-FD approximations, improving the approximation of differential operators in multiple dimensions by using polyharmonic splines augmented with polynomials, constructing suitable node layouts, and smoothing of the initial data to enable high order convergence of the method. Finally, we compare RBF-FD with other available methods on a plethora of pricing problems to form an objective image of the method’s performance.

Future development of RBF-FD is expected to result in a solid mesh-free high order method for multi-dimensional PDEs, that can be used together with dimension reduction techniques to efficiently solve problems of high dimensionality that we often encounter in finance.

Place, publisher, year, edition, pages
Uppsala: Acta Universitatis Upsaliensis, 2018. p. 63
Series
Digital Comprehensive Summaries of Uppsala Dissertations from the Faculty of Science and Technology, ISSN 1651-6214 ; 1702
Keywords
Radial basis function, Finite difference, Computational finance, Pricing of financial derivatives, Option pricing, Partial differential equation
National Category
Computational Mathematics
Research subject
Scientific Computing with specialization in Numerical Analysis
Identifiers
urn:nbn:se:uu:diva-357220 (URN)978-91-513-0403-8 (ISBN)
Public defence
2018-09-28, ITC 2446, Polacksbacken, Lägerhyddsvägen 2, Uppsala, 10:15 (English)
Opponent
Supervisors
Available from: 2018-09-06 Created: 2018-08-14 Last updated: 2018-10-02

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von Sydow, LinaHöök, Lars JosefLarsson, ElisabethMilovanović, SlobodanShcherbakov, Victor

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