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Valuing American Put Options Using Chebyshev Polynomial Approximation


  • Guglielmo Maria Caporale


  • Mario Cerrato


This pa per suggests a simple valuation method based on Chebyshev approximation at Chebyshev nodes to value American put options. It is similar to the approach taken in Sullivan (2000), where the option`s continuation region function is estimated by using a Chebyshev polynomial. However, in contrast to Sullivan (2000), the functional is fitted by using Chebyshev nodes. The suggested method is flexible, easy to program and efficient, and can be extended to price other types of derivative instruments. It is also applicable in other fields, providing efficient solutions to complex systems of partial differential equations. The paper also describes an alternative method based on dynamic programming and backward induction to approximate the option value in each time period.

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  • Guglielmo Maria Caporale & Mario Cerrato, 2005. "Valuing American Put Options Using Chebyshev Polynomial Approximation," Public Policy Discussion Papers 05-03, Economics and Finance Section, School of Social Sciences, Brunel University.
  • Handle: RePEc:bru:bruppp:05-03

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    1. Javier Hualde & Peter M. Robinson, 2002. "Root-n-Consistent Estimation of Weak Fractional Cointegration," Faculty Working Papers 08/02, School of Economics and Business Administration, University of Navarra.
    2. Hassler, Uwe & Breitung, Jörg, 2002. "A Residual-Based LM Test for Fractional Cointegration," Darmstadt Discussion Papers in Economics 114, Darmstadt University of Technology, Department of Law and Economics.
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