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Model Reduction Methods In Option Pricing

Author

Listed:
  • Antonio Falcó

    (Universidad CEU Cardenal Herrera)

  • Francisco Chinesta

    (CNRS-ENSAM-ESEM)

  • Mariano González

    (Universidad CEU San Pablo)

Abstract

In 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.

Suggested Citation

  • Antonio Falcó & Francisco Chinesta & Mariano González, 2006. "Model Reduction Methods In Option Pricing," Working Papers. Serie AD 2006-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2006-16
    as

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2006-16.pdf
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    References listed on IDEAS

    as
    1. Dmitry Davydov & Vadim Linetsky, 2003. "Pricing Options on Scalar Diffusions: An Eigenfunction Expansion Approach," Operations Research, INFORMS, vol. 51(2), pages 185-209, April.
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    More about this item

    Keywords

    Model Reduction; Proper Orthogonal Decomposition; Finite Difference Schemes; Crank–Nicolson Scheme.;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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