An Irregular Grid Approach for Pricing High-Dimensional American Options

S.J. Berridge, J.M. Schumacher

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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 complementarity problem on an irregular grid.We approximate the partial differential operator on this grid by appealing to the SDE representation of the underlying process and computing the root of the transition probability matrix of an approximating Markov chain.Experimental results in five dimensions are presented for four different payoff functions.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages31
Volume2004-18
Publication statusPublished - 2004

Publication series

NameCentER Discussion Paper
Volume2004-18

Keywords

  • option pricing
  • inequality
  • markov chains

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    Berridge, S. J., & Schumacher, J. M. (2004). An Irregular Grid Approach for Pricing High-Dimensional American Options. (CentER Discussion Paper; Vol. 2004-18). Finance.