Abstract
We propose and test a new method for pricing American options in a high dimensional setting. The method is centred around the approximation of the associated variational inequality on an irregular grid. We approximate the partial differential operator on this grid by appealing to the SDE representation of the stock process and computing the logarithm of the transition probability matrix of an approximating Markov chain. The results of numerical tests in five dimensions are promising.
Research supported by Netherlands Organisation for Scientific Research (NWO)
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Keywords
- Variational Inequality
- Option Price
- Complementarity Problem
- Linear Complementarity Problem
- Transition Probability Matrix
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Berridge, S., Schumacher, H. (2002). An Irregular Grid Method for Solving High- Dimensional Problems in Finance. In: Sloot, P.M.A., Hoekstra, A.G., Tan, C.J.K., Dongarra, J.J. (eds) Computational Science — ICCS 2002. ICCS 2002. Lecture Notes in Computer Science, vol 2330. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-46080-2_53
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DOI: https://doi.org/10.1007/3-540-46080-2_53
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