Error estimates for finite difference approximations of American put option price
AbstractFinite difference approximations to multi-asset American put option price are considered. The assets are modelled as a multi-dimensional diffusion process with variable drift and volatility. Approximation error of order one quarter with respect to the time discretisation parameter and one half with respect to the space discretisation parameter is proved by reformulating the corresponding optimal stopping problem as a solution of a degenerate Hamilton-Jacobi-Bellman equation. Furthermore, the error arising from restricting the discrete problem to a finite grid by reducing the original problem to a bounded domain is estimated.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1109.4032.
Date of creation: Sep 2011
Date of revision: Sep 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
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- Barone-Adesi, Giovanni, 2005. "The saga of the American put," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(11), pages 2909-2918, November.
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