Journal of Computational Finance

Risk.net

Alternating direction implicit finite difference schemes for the Heston-Hull-White partial differential equation

Tinne Haentjens and Karel J. In 't Hout

ABSTRACT

In this paper we investigate the effectiveness of alternating direction implicit (ADI) time-discretization schemes in the numerical solution of the three-dimensional Heston-Hull-White partial differential equation, which is semidiscretized by applying finite difference schemes on nonuniform spatial grids. We consider the Heston-Hull-White model with arbitrary correlation factors, with timedependent mean-reversion levels, with short and long maturities, for cases where the Feller condition is satisfied and for cases where it is not. In addition, both European-style call options and up-and-out call options are considered. It is shown through extensive tests that ADI schemes with a proper choice of parameters perform very well in all situations, in terms of stability, accuracy and efficiency.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: