Discretization of the Dirac delta function for application in option pricing
This paper compares two different approximations of the Dirac deltafunction used in a Fokker-Planck equation. Both methods deal with the singularity problem in the initial condition. The Dirac delta approximation, constructed in MATLAB with a method derived by Tornberg and Engquist, was compared to...
| Main Authors: | , |
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| Format: | Others |
| Language: | English |
| Published: |
Uppsala universitet, Avdelningen för beräkningsvetenskap
2016
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| Online Access: | http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-297648 |
| Summary: | This paper compares two different approximations of the Dirac deltafunction used in a Fokker-Planck equation. Both methods deal with the singularity problem in the initial condition. The Dirac delta approximation, constructed in MATLAB with a method derived by Tornberg and Engquist, was compared to an already given method Aït-Sahalia. The methods were implemented as the initial condition in the Fokker-Planck equation, e.g approximating a probability density function. In most cases Aït-Sahalia and Tornberg-Engquist were interchangeable. During specific circumstances one method was significantly more accurate than the other. Increasing the amount of time/spatial steps enhanced the differences in error while having less time/spatial steps made the difference in error converge. The Aït-Sahalia method produces slightly more accurate results in more cases. |
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