Luca Barzanti () (University of Bologna) Corrado Corradi () (University of Bologna) Martina Nardon () (Department of Applied Mathematics, University of Venice)
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Richardson extrapolation (RE) is a commonly used technique in financial applications for accelerating the convergence of numerical methods. Particularly in option pricing, it is possible to refine the results of several approaches by applying RE, in order to avoid the difficulties of employing slowly converging schemes. But the effectiveness of such a technique is fully achieved when its repeated version (RRE) is applied. Nevertheless, its application in financial literature is pretty rare. This is probably due to the necessity to pay special attention to the numerical aspects of its implementation, such as the choice of both the sequence of the stepsizes and the order of the method. In this contribution, we consider several numerical schemes for the valuation of American options and investigate the possibility of an appropriate application of RRE. As a result, we find that, in the analyzed approaches in which the convergence is monotonic, RRE can be used as an effective tool for improving significantly the accuracy.
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Paper provided by Department of Applied Mathematics, University of Venice in its series Working Papers with number
147.
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