Pseudospectral methods for pricing options

Sangwon Suh

Quantitative Finance, 2009, vol. 9, issue 6, 705-715

Abstract: Models with two or more risk sources have been widely applied in option pricing in order to capture volatility smiles and skews. However, the computational cost of implementing these models can be large—especially for American-style options. This paper illustrates how numerical techniques called 'pseudospectral' methods can be used to solve the partial differential and partial integro-differential equations that apply to these multifactor models. The method offers significant advantages over finite-difference and Monte Carlo simulation schemes in terms of accuracy and computational cost.

Keywords: American options; Options pricing; Partial differential equations; Stochastic volatility (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1080/14697680902785292

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