Numerical solution of a non-arbitrage liquidity model based on uncertain volatility

Abstract

Abstract: The option pricing model in illiquidity markets was expanded to general situations by introducing two kinds of uncertain volatility models. As it is difficulty to get analytical solutions for the model in complicated cases, a numerical solution was discussed by establishing corresponding differential equations; and the stability and consistency of the sdution were proved. Finally, the influence of some parameters to the solution was provided in numerical examples. The results show that the algorithm reduced the restriction on step-length requirements, and satisfactory approximation can be found with less computation.

Key words: illiquid markets, uncertain volatility, numerical solution, option, difference scheme

CLC Number:

O211
F830.9

NIU Cheng-hu, ZHOU Sheng-wu. Numerical solution of a non-arbitrage liquidity model based on uncertain volatility[J]. Journal of East China Normal University(Natural Sc, 2012, 2012(1): 121-129, 137.

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