Using Localised Quadratic Functions on an Irregular Grid for Pricing High-Dimensional American Options
AbstractWe 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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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-20.
Date of creation: 2004
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Web page: http://center.uvt.nl
option pricing; inequality; markov chains;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
- NEP-CMP-2004-04-04 (Computational Economics)
- NEP-RMG-2004-04-04 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Berridge, S.J. & Schumacher, J.M., 2002.
"An Irregular Grid Approach for Pricing High Dimensional American Options,"
2002-99, Tilburg University, Center for Economic Research.
- Berridge, S.J. & Schumacher, J.M., 2004. "An Irregular Grid Approach for Pricing High-Dimensional American Options," Discussion Paper 2004-18, Tilburg University, Center for Economic Research.
- L. C. G. Rogers, 2002. "Monte Carlo valuation of American options," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 271-286.
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