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ADI schemes for pricing American options under the Heston model

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  • Tinne Haentjens
  • Karel in 't Hout
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    Abstract

    In this paper a simple, effective adaptation of Alternating Direction Implicit (ADI) time discretization schemes is proposed for the numerical pricing of American-style options under the Heston model via a partial differential complementarity problem. The stability and convergence of the new methods are extensively investigated in actual, challenging applications. In addition a relevant theoretical result is proved.

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    File URL: http://arxiv.org/pdf/1309.0110
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1309.0110.

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    Date of creation: Aug 2013
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    Handle: RePEc:arx:papers:1309.0110

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    Web page: http://arxiv.org/

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    1. Samuli Ikonen & Jari Toivanen, 2007. "Componentwise Splitting Methods For Pricing American Options Under Stochastic Volatility," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 331-361.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
    3. Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, vol. 32(2), pages 449-62, May.
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