Pricing American options using a space-time adaptive finite difference method

Jonas Persson and Lina von Sydow

Mathematics and Computers in Simulation (MATCOM), 2010, vol. 80, issue 9, 1922-1935

Abstract: American options are priced numerically using a space- and time-adaptive finite difference method. The generalized Black–Scholes operator is discretized on a Cartesian structured but non-equidistant grid in space. The space- and time-discretizations are adjusted such that a predefined tolerance level on the local discretization error is met. An operator splitting technique is used to separately handle the early exercise constraint and the solution of linear systems of equations from the finite difference discretization of the linear complementarity problem. In numerical experiments three variants of the adaptive time-stepping algorithm with and without local time-stepping are compared.

Keywords: Finite difference method; Adaptive method; American option; Stochastic volatility; Local time-stepping (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:80:y:2010:i:9:p:1922-1935

DOI: 10.1016/j.matcom.2010.02.008

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