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The Compound BSDE Method: A Fully Forward Method for Option Pricing and Optimal Stopping Problems in Finance

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  • Zhipeng Huang
  • Cornelis W. Oosterlee

Abstract

We propose the Compound BSDE method, a fully forward, deep-learning-based approach for solving a broad class of problems in financial mathematics, including optimal stopping. The method is based on a reformulation of option pricing problems in terms of a system of backward stochastic differential equations (BSDEs), which offers a new perspective on the numerical treatment of compound options and optimal stopping problems such as Bermudan option pricing. Building on the classical deep BSDE method for a single BSDE, we develop an algorithm for compound BSDEs and establish its convergence properties. In particular, we derive an a posteriori error estimate for the proposed method. Numerical experiments demonstrate the accuracy and computational efficiency of the approach, and illustrate its effectiveness for high-dimensional option pricing and optimal stopping problems.

Suggested Citation

  • Zhipeng Huang & Cornelis W. Oosterlee, 2026. "The Compound BSDE Method: A Fully Forward Method for Option Pricing and Optimal Stopping Problems in Finance," Papers 2601.18634, arXiv.org, revised Jan 2026.
    • Handle: RePEc:arx:papers:2601.18634
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    References listed on IDEAS

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