We propose a method for pricing high-dimensional American options on an irregular grid; the method involves using quadratic functions to approximate the local effect of the Black-Scholes operator.Once such an approximation is known, one can solve the pricing problem by time stepping in an explicit or implicit manner.We study stability of the method in two dimensions, and find that the grid structure is important in providing a stable approximation to the operator.
|Place of Publication||Tilburg|
|Number of pages||22|
|Publication status||Published - 2004|
|Name||CentER Discussion Paper|
- option pricing
- markov chains