A spectral-collocation method for pricing perpetual American puts with stochastic volatility

Based on the Legendre pseudospectral method, we propose a numerical treatment for pricing perpetual American put option with stochastic volatility. In this simple approach, a nonlinear algebraic equation system is first derived, and then solved by the Gauss–Newton algorithm. The convergence of the current scheme is ensured by constructing a test example similar to the original problem, and comparing the numerical option prices with those produced by the classical Projected SOR (PSOR) method. The results of our numerical experiments suggest that the proposed scheme is both accurate and efficient, since the spectral accuracy can be easily achieved within a small number of iterations. Moreover, based on the numerical results, we also discuss the impact of stochastic volatility term on the prices of perpetual American puts.