Projection and Contraction Method for Pricing American Bond Options

Qi Zhang, Qi Wang, Ping Zuo (), Hongbo Du and Fangfang Wu
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Qi Zhang: School of Science, Shenyang University of Technology, Shenyang 110870, China
Qi Wang: School of Science, Shenyang University of Technology, Shenyang 110870, China
Ping Zuo: School of New Energy and Intelligent Networked Automobile, University of Sanya, Sanya 572022, China
Hongbo Du: School of Science, Shenyang University of Technology, Shenyang 110870, China
Fangfang Wu: School of Science, Shenyang University of Technology, Shenyang 110870, China

Mathematics, 2023, vol. 11, issue 22, 1-13

Abstract: In this paper, an effective numerical method is proposed for a linear complementarity problem (LCP) arising in the valuation of American bond options under the Cox–Ingersoll–Ross (CIR) model. Firstly, a variable substitution is used to simplify the linear complementary model. Secondly, the finite difference method is adopted to discretize the simplified model, and an equivalent variational form is obtained. Based on the positive definiteness of the discretized matrix, a projection and contraction method (PCM) is adopted for the resulting discretized variational problem. Finally, numerical experiments highlight the effectiveness and performance of the proposed algorithm.

Keywords: Cox–Ingersoll–Ross model; American bond options; linear complementarity problem; finite difference method; projection and contraction method (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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