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Using localised quadratic functions on an irregular grid for pricing high-dimensional American options

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Author Info
Berridge, S.J.
Schumacher, J.M. (Tilburg University, Center for Economic Research)

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Abstract

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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 20.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200420

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

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  1. Berridge, S.J. & Schumacher, J.M., 2002. "An irregular grid approach for pricing high-dimensional American options," Discussion Paper 99, Tilburg University, Center for Economic Research. [Downloadable!]
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