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A Sotchastic Mesh Method for Pricing High-Dimensional American Options

Author

Listed:
  • Broadie, M.
  • Glasserman, P.

Abstract

High-dimensional pricing problems frequently arise with financial options (examples include basket options, outperformance options, interest-rate and foreign currency options) and real options. American versions of these options, i.e., where the owner has the right to exercise early, are particularly challenging to price. We present a new stochastic mesh method for pricing high-dimensional American options when there is a finite, but possibly large, number of exercise dates. The algorithm provides point estimates and confidence intervals and it converges to the correct values as the computational effort increases. Computational evidence is given which indicates the viability of the method.

Suggested Citation

  • Broadie, M. & Glasserman, P., 1997. "A Sotchastic Mesh Method for Pricing High-Dimensional American Options," Papers 98-04, Columbia - Graduate School of Business.
    • Handle: RePEc:fth:colubu:98-04
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    Citations

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    Cited by:

    1. Boyle, Phelim P. & Kolkiewicz, Adam W. & Tan, Ken Seng, 2003. "An improved simulation method for pricing high-dimensional American derivatives," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 62(3), pages 315-322.
    2. Hatem Ben-Ameur & Michèle Breton & Pierre L'Ecuyer, 2002. "A Dynamic Programming Procedure for Pricing American-Style Asian Options," Management Science, INFORMS, vol. 48(5), pages 625-643, May.
    3. Mark Broadie & Yusaku Yamamoto, 2003. "Application of the Fast Gauss Transform to Option Pricing," Management Science, INFORMS, vol. 49(8), pages 1071-1088, August.
    4. Leisen, Dietmar P. J., 1999. "The random-time binomial model," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1355-1386, September.
    5. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    6. Yanhui Shen, 2023. "American Option Pricing using Self-Attention GRU and Shapley Value Interpretation," Papers 2310.12500, arXiv.org.

    More about this item

    Keywords

    FINANCIAL MARKET ; ECONOMETRICS ; STOCHASTIC PROCESS;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

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