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Working paper
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English

Valuing American options using fast recursive projections

Contributors

Cosma, Antonio; Galluccio, Stefano; Scaillet, Olivier

Number of pages

46

Publication date

2012

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 pricing
  • American option
  • Bermudan option
  • Discrete transform
  • Discrete dividend paying stock
  • Numerical techniques

Classification

  • JEL : G13

UNIGE affiliation entities

Citation (ISO format)

COSMA, Antonio, GALLUCCIO, Stefano, SCAILLET, Olivier. Valuing American options using fast recursive projections. 2012 doi: 10.2139/ssrn.2091236

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Working paper

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Technical informations

Creation

15/11/2014 19:01:00

First validation

15/11/2014 19:01:00

Update

14/03/2023 22:15:24

Status update

14/03/2023 22:15:24

Last indexation

30/10/2024 20:45:26
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