Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions

Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions

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Article ID: iaor200972014
Country: Germany
Volume: 70
Issue: 3
Start Page Number: 505
End Page Number: 525
Publication Date: Dec 2009
Journal: Mathematical Methods of Operations Research
Authors: ,
Keywords: investment
Abstract:

We approximate the price of the American put for jump diffusions by a sequence of functions, which are computed iteratively. This sequence converges to the price function uniformly and exponentially fast. Each element of the approximating sequence solves an optimal stopping problem for geometric Brownian motion, and can be numerically computed using the classical finite difference methods. We prove the convergence of this numerical scheme and present examples to illustrate its performance.

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