Using Localised Quadratic Functions on an Irregular Grid for Pricing High-Dimensional American Options

S.J. Berridge, J.M. Schumacher

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Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages22
Volume2004-20
Publication statusPublished - 2004

Publication series

NameCentER Discussion Paper
Volume2004-20

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Keywords

  • option pricing
  • inequality
  • markov chains

Cite this

Berridge, S. J., & Schumacher, J. M. (2004). Using Localised Quadratic Functions on an Irregular Grid for Pricing High-Dimensional American Options. (CentER Discussion Paper; Vol. 2004-20). Finance.