A Sotchastic Mesh Method for Pricing High-Dimensional American Options

M. Broadie and P. Glasserman

Working Papers from Columbia - Graduate School of Business

Abstract: High-dimensional pricing problems frequently arise with financial options (examples include basket options, outperformance options, interest-rate and foreign currency options) and real options. American versions of these options, i.e., where the owner has the right to exercise early, are particularly challenging to price. We present a new stochastic mesh method for pricing high-dimensional American options when there is a finite, but possibly large, number of exercise dates. The algorithm provides point estimates and confidence intervals and it converges to the correct values as the computational effort increases. Computational evidence is given which indicates the viability of the method.

Keywords: FINANCIAL MARKET; ECONOMETRICS; STOCHASTIC PROCESS (search for similar items in EconPapers)
JEL-codes: C15 G10 (search for similar items in EconPapers)
Pages: 37 pages
Date: 1997
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:fth:colubu:98-04

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