Stable, second order accurate schemes: part I, Equity pricing

One of the most frequently asked questions with PDE models is how to model boundaries and impose boundary conditions.

Some years ago I stumbled on the ADE method but I needed the elegant Ficher theory in combination with good schemes for convection terms (most books only deal with diffusion and the essential difficulty is when you combine them).

This working paper adresses these issues and we compare our results with other numerical methods for a range of one factor problems, as discussed in the article.

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http://www.datasimfinancial.com/forum/viewtopic.php?t=289

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The ADE applied to early exercise seems to be particularly fast and accurate and is kind of modified Brennan Schwartz algorithm.

Thanks very much to all those who provided feedbak and input. Of course, all errors are my own.

I welcome comments and suggestions. A forthcoming paper will deal with other 1-factor and 2-factor models.