Convergence of Iterative Laplace Transform Methods for a System of Fractional PDEs and PIDEs Arising in Option Pricing

Abstract

Iterative Laplace transform methods for fractional partial differential equations and fractional partial integro-differential equations arising in European option pricing with the Lévy α-stable processes and regime-switching or state-dependent jump rates are studied and numerical contour integral methods to inverse the Laplace transform are developed. It is shown that the methods under consideration have the second-order convergence rate in space and spectral-order convergence for Laplace transform inversion.