A finite dimensional approximation for pricing moving average options
We propose a method for pricing American options whose pay-off depends on the moving average of the underlying asset price. The method uses a finite dimensional approximation of the infinite-dimensional dynamics of the moving average process based on a truncated Laguerre series expansion. The resulting problem is a finite-dimensional optimal stopping problem, which we propose to solve with a least squares Monte Carlo approach. We analyze the theoretical convergence rate of our method and present numerical results in the Black-Scholes framework.
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- Gapeev, Pavel V. & Reiß, Markus, 2006.
"An optimal stopping problem in a diffusion-type model with delay,"
Statistics & Probability Letters,
Elsevier, vol. 76(6), pages 601-608, March.
- Pavel V. Gapeev & Markus Reiß, 2005. "An optimal stopping problem in a diffusion-type model with delay," SFB 649 Discussion Papers SFB649DP2005-005, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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