Reduced basis methods for pricing options with the Black-Scholes and Heston model

In this paper, we present a reduced basis method for pricing European and American options based on the Black-Scholes and Heston model. To tackle each model numerically, we formulate the problem in terms of a time dependent variational equality or inequality. We apply a suitable reduced basis approach for both types of options. The characteristic ingredients used in the method are a combined POD-Greedy and Angle-Greedy procedure for the construction of the primal and dual reduced spaces. Analytically, we prove the reproduction property of the reduced scheme and derive a posteriori error estimators. Numerical examples are provided, illustrating the approximation quality and convergence of our approach for the different option pricing models. Also, we investigate the reliability and effectivity of the error estimators.Comment: 25 pages, 27 figure

A weighted reduced basis method for parabolic PDEs with random data

This work considers a weighted POD-greedy method to estimate statistical outputs parabolic PDE problems with parametrized random data. The key idea of weighted reduced basis methods is to weight the parameter-dependent error estimate according to a probability measure in the set-up of the reduced space. The error of stochastic finite element solutions is usually measured in a root mean square sense regarding their dependence on the stochastic input parameters. An orthogonal projection of a snapshot set onto a corresponding POD basis defines an optimum reduced approximation in terms of a Monte Carlo discretization of the root mean square error. The errors of a weighted POD-greedy Galerkin solution are compared against an orthogonal projection of the underlying snapshots onto a POD basis for a numerical example involving thermal conduction. In particular, it is assessed whether a weighted POD-greedy solutions is able to come significantly closer to the optimum than a non-weighted equivalent. Additionally, the performance of a weighted POD-greedy Galerkin solution is considered with respect to the mean absolute error of an adjoint-corrected functional of the reduced solution.Comment: 15 pages, 4 figure

Comparison of data-driven uncertainty quantification methods for a carbon dioxide storage benchmark scenario

A variety of methods is available to quantify uncertainties arising with\-in the modeling of flow and transport in carbon dioxide storage, but there is a lack of thorough comparisons. Usually, raw data from such storage sites can hardly be described by theoretical statistical distributions since only very limited data is available. Hence, exact information on distribution shapes for all uncertain parameters is very rare in realistic applications. We discuss and compare four different methods tested for data-driven uncertainty quantification based on a benchmark scenario of carbon dioxide storage. In the benchmark, for which we provide data and code, carbon dioxide is injected into a saline aquifer modeled by the nonlinear capillarity-free fractional flow formulation for two incompressible fluid phases, namely carbon dioxide and brine. To cover different aspects of uncertainty quantification, we incorporate various sources of uncertainty such as uncertainty of boundary conditions, of conceptual model definitions and of material properties. We consider recent versions of the following non-intrusive and intrusive uncertainty quantification methods: arbitary polynomial chaos, spatially adaptive sparse grids, kernel-based greedy interpolation and hybrid stochastic Galerkin. The performance of each approach is demonstrated assessing expectation value and standard deviation of the carbon dioxide saturation against a reference statistic based on Monte Carlo sampling. We compare the convergence of all methods reporting on accuracy with respect to the number of model runs and resolution. Finally we offer suggestions about the methods' advantages and disadvantages that can guide the modeler for uncertainty quantification in carbon dioxide storage and beyond