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Valuing American options using fast recursive projections

Cosma, Antonio
Galluccio, Stefano
Year 2012
Description 46 p.
Abstract This paper introduces a new numerical option pricing method by fast recursive projections. The projection step consists in representing the payoff and the state price density with a fast discrete transform based on a simple grid sampling. The recursive step consists in transmitting coefficients of the representation from one date to the previous one by an explicit recursion formula. We characterize the convergence rate of the computed option price. Numerical illustrations with different American and Bermudan payoffs with discrete dividend paying stocks in the Black-Scholes and Heston models show that the method is fast, accurate, and general.
Keywords Option pricingAmerican optionBermudan optionDiscrete transformDiscrete dividend paying stockNumerical techniques
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COSMA, Antonio, GALLUCCIO, Stefano, SCAILLET, Olivier. Valuing American options using fast recursive projections. 2012 doi: 10.2139/ssrn.2091236 https://archive-ouverte.unige.ch/unige:41856

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Deposited on : 2014-11-16

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