A new method of valuing American options based on Brownian models

Yue Liu, Aijun Yang, Jinguan Lin and Jingjing Yao

Communications in Statistics - Theory and Methods, 2021, vol. 50, issue 20, 4809-4821

Abstract: This paper investigates the valuation of American option by developing a new technique for solving the optimal stopping problem modeled with Brownian motion. In particular, applying a martingale technique, the value function of option is approximated by specific basis functions. Compared with the traditional approaches, our method is more efficient without losing the accuracy. We show both the theoretical analysis and numerical implements.

Date: 2021
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DOI: 10.1080/03610926.2020.1725053

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