Nonlinear PDE model for European options with transaction costs under Heston stochastic volatility
Publication Name
Communications in Nonlinear Science and Numerical Simulation
Abstract
In this work, we formulate a pricing model for European options with transaction costs under Heston-type stochastic volatility. The resulting pricing partial differential equations (PDEs) are a pair of nonlinear convection-diffusion-reaction equations with mixed derivative terms, for the writing and holding prices, respectively. The equations are solved numerically by the explicit Euler method. Numerical experiments are presented to illustrate the order of convergence and the effect of the transaction costs on option prices.
Open Access Status
This publication is not available as open access
Volume
103
Article Number
105986