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Error estimates for finite difference approximations of American put option price

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  • David \v{S}i\v{s}ka
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    Abstract

    Finite 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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    File URL: http://arxiv.org/pdf/1109.4032
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    Paper provided by arXiv.org in its series Papers with number 1109.4032.

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    Date of creation: Sep 2011
    Date of revision: Sep 2011
    Handle: RePEc:arx:papers:1109.4032

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    1. Barone-Adesi, Giovanni, 2005. "The saga of the American put," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2909-2918, November.
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