TY - JOUR
T1 - A finite element approach to the numerical solutions of Leland's model
AU - Wei, Dongming
AU - Erlangga, Yogi Ahmad
AU - Zhumakhanova, Gulzat
N1 - Publisher Copyright:
© 2023 Elsevier Inc.
PY - 2024/1
Y1 - 2024/1
N2 - 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 favourably with the finite difference results in the literature for the model.
AB - 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 favourably with the finite difference results in the literature for the model.
KW - Finite element
KW - Leland's model
KW - Option pricing
UR - http://www.scopus.com/inward/record.url?scp=85168997254&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85168997254&partnerID=8YFLogxK
U2 - 10.1016/j.iref.2023.07.076
DO - 10.1016/j.iref.2023.07.076
M3 - Article
AN - SCOPUS:85168997254
SN - 1059-0560
VL - 89
SP - 582
EP - 593
JO - International Review of Economics and Finance
JF - International Review of Economics and Finance
ER -