On the Stability of a Compact Finite Difference Scheme for Option Pricing

Abstract

In this short paper we are concerned with the von Neumann stability analy- sis ofa compact high-order finite difference scheme for option pricing in the Heston stochastic volatility model. We first review results on the unconditional stability in the case of vanishing correlation and then present some new results on the behavior of the amplification factor for non-zero correlation. 1