Using Localised Quadratic Functions on an Irregular Grid for Pricing High-Dimensional American Options

S.J. Berridge and Johannes M. Schumacher

No 2004-20, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: We propose a method for pricing high-dimensional American options on an irregular grid; the method involves using quadratic functions to approximate the local effect of the Black-Scholes operator.Once such an approximation is known, one can solve the pricing problem by time stepping in an explicit or implicit manner.We study stability of the method in two dimensions, and find that the grid structure is important in providing a stable approximation to the operator.

JEL-codes: C15 C61 C63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-rmg
Date: 2004
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