An Irregular Grid Approach for Pricing High-Dimensional American Options

S.J. Berridge; J.M. Schumacher

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 language	English
Place of Publication	Tilburg
Publisher	Finance
Number of pages	31
Volume	2004-18
Publication status	Published - 2004

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Name	CentER Discussion Paper
Volume	2004-18

Keywords

option pricing
inequality
markov chains

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title = "An Irregular Grid Approach for Pricing High-Dimensional American Options",

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.",

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AU - Berridge, S.J.

AU - Schumacher, J.M.

N1 - Pagination: 31

PY - 2004

Y1 - 2004

N2 - 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.

AB - 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.

KW - option pricing

KW - inequality

KW - markov chains

M3 - Discussion paper

VL - 2004-18

T3 - CentER Discussion Paper

BT - An Irregular Grid Approach for Pricing High-Dimensional American Options

PB - Finance

CY - Tilburg

ER -

An Irregular Grid Approach for Pricing High-Dimensional American Options

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