High-order ADI scheme for option pricing in stochastic volatility models

We propose a new high-order alternating direction implicit (ADI) finite difference scheme for the solution of initial–boundary value problems of convection–diffusion type with mixed derivatives and non-constant coefficients, as they arise from stochastic volatility models in option pricing. Our approach combines different high-order spatial discretisations with Hundsdorfer and Verwer’s ADI time-stepping method, to obtain an efficient method which is fourth-order accurate in space and second-order accurate in time. Numerical experiments for the European put option pricing problem using Heston’s stochastic volatility model confirm the high-order convergence.