A finite element approach to the numerical solutions of Leland’s model
Source of Publication
International Review of Economics & Finance
In this paper, finite element method is applied to Leland’s model for numerical simulation of option pricing with transaction costs. Spatial finite element models based on P1 and/or P2 elements are formulated in combination with a Crank–Nicolson-type temporal scheme. The temporal scheme is implemented using the Rannacher approach. Examples with several sets of parameter values are presented and compared with finite difference results in the literature. Spatial–temporal mesh-size ratios are observed for controlling the stability of our method. Our results compare favorably with the finite difference results in the literature for the model.
Option pricing, Leland’s model, Finite element
Wei, Dongming; Erlangga, Yogi Ahmad; and Zhumakhanova, Gulzat, "A finite element approach to the numerical solutions of Leland’s model" (2023). All Works. 5939.
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