Radial basis function partition of unity methods for pricing vanilla basket options

Meshfree methods based on radial basis function (RBF) approximation are becoming widely used for solving PDE problems. They are flexible with respect to the problem geometry and highly accurate. A disadvantage of these methods is that the linear system to be solved becomes dense for globally supported RBFs. A remedy is to introduce localisation techniques such as partition of unity. RBF partition of unity methods (RBF-PUM) allow for a significant sparsification of the linear system and lower the computational effort. In this work we apply a global RBF method as well as RBF-PUM to problems in option pricing. We consider one- and two-dimensional vanilla options. In order to price American options we employ a penalty approach. A penalty term, suitable for American multi-asset call options, has been designed. RBF PUM is shown to be competitive compared with a finite difference method and a global RBF method. It is as accurate as the global RBF method, but significantly faster. The results for RBF PUM look promising for extension to higher dimensional problems. (C) 2015 Elsevier Ltd. All rights reserved.