Numerical approximation of a time-fractional Black-Scholes equation

摘要

In this paper a time-fractional Black-Scholes equation is examined. We transform the initial value problem into an equivalent integral-differential equation with a weakly singular kernel and use an integral discretization scheme on an adapted mesh for the time discretization. A rigorous analysis about the convergence of the time discretization scheme is given by taking account of the possibly singular behavior of the exact solution and first-order convergence with respect to the time variable is proved. For overcoming the possibly nonphysical oscillation in the computed solution caused by the degeneracy of the Black-Scholes differential operator, we employ a central difference scheme on a piecewise uniform mesh for the spatial discretization. It is proved that the scheme is stable and second-order convergent with respect to the spatial variable. Numerical experiments support these theoretical results. (C) 2018 Elsevier Ltd. All rights reserved.