Using Localised Quadratic Functions on an Irregular Grid for Pricing High-Dimensional American Options

We propose a method for pricing high-dimensional American options on an irregular grid; the method involves using quadratic functions to approximate the local effect of the Black-Scholes operator.Once such an approximation is known, one can solve the pricing problem by time stepping in an explicit or implicit manner.We study stability of the method in two dimensions, and find that the grid structure is important in providing a stable approximation to the operator.

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Year of publication:	2004
Authors:	Schumacher, Johannes M. ; Berridge, S.J.
Institutions:	Tilburg University, Center for Economic Research
Subject:	option pricing \| inequality \| markov chains

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Extent:	application/pdf
Series:	Discussion Paper.
Type of publication:	Book / Working Paper
Notes:	The text is part of a series CentER Discussion Paper Number 2004-20
Classification:	C15 - Statistical Simulation Methods; Monte Carlo Methods ; C61 - Optimization Techniques; Programming Models; Dynamic Analysis ; C63 - Computational Techniques
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10011091409