A new efficient numerical method for solving American option under regime switching model
| Autor: | LUCAS JODAR, Vera Egorova, Rafael Company Rossi |
|---|---|
| Rok vydání: | 2016 |
| Předmět: |
Mathematical optimization
Computation Numerical analysis Finite difference method Boundary (topology) 010103 numerical & computational mathematics 01 natural sciences Free boundary Regime switching 010101 applied mathematics Computational Mathematics Transformation (function) Computational Theory and Mathematics Modeling and Simulation Finite difference methods Optimal stopping Finite difference methods for option pricing 0101 mathematics MATEMATICA APLICADA Put option Front-fixing transformation Mathematics |
| Zdroj: | RiuNet. Repositorio Institucional de la Universitat Politécnica de Valéncia instname |
| ISSN: | 0898-1221 |
| DOI: | 10.1016/j.camwa.2015.11.019 |
| Popis: | [EN] A system of coupled free boundary problems describing American put option pricing under regime switching is considered. In order to build numerical solution firstly a front-fixing transformation is applied. Transformed problem is posed on multidimensional fixed domain and is solved by explicit finite difference method. The numerical scheme is conditionally stable and is consistent with the first order in time and second order in space. The proposed approach allows the computation not only of the option price but also of the optimal stopping boundary. Numerical examples demonstrate efficiency and accuracy of the proposed method. The results are compared with other known approaches to show its competitiveness. This work has been partially supported by the European Union in the FP7- PEOPLE-2012-ITN program under Grant Agreement Number 304617 (FP7 Marie Curie Action, Project Multi-ITN STRIKE-Novel Methods in Computational Finance) and the Ministerio de Economia y Competitividad Spanish grant MTM2013-41765-P. |
| Databáze: | OpenAIRE |
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