Model Reduction Methods In Option Pricing
AbstractIn this work we introduce the Proper Orthogonal Decomposition (POD)approach to the valuation of contingent claims for one–dimensional price models.First, we present the POD in the context of an abstract Hilbert space and we givean application for the numerical pricing of Double Barrier Options. In a finitedimension setting, we show the model reduction method for Finite Differenceschemes of implicit type. In particular, we construct the reduced version of theCrank–Nicolson scheme and some numerical examples are given.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2006-16.
Length: 27 pages
Date of creation: Jul 2006
Date of revision:
Publication status: Published by Ivie
Model Reduction; Proper Orthogonal Decomposition; Finite Difference Schemes; Crank–Nicolson Scheme.;
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