Pricing American options via multi-level approximation methods

Denis Belomestny, Fabian Dickmann and Tigran Nagapetyan

Papers from arXiv.org

Abstract: In this article we propose a novel approach to reduce the computational complexity of various approximation methods for pricing discrete time American options. Given a sequence of continuation values estimates corresponding to different levels of spatial approximation and time discretization, we propose a multi-level low biased estimate for the price of an American option. It turns out that the resulting complexity gain can be rather high and can even reach the order (\varepsilon^{-1}) with (\varepsilon) denoting the desired precision. The performance of the proposed multilevel algorithm is illustrated by a numerical example of pricing Bermudan max-call options.

Date: 2013-03, Revised 2013-12
New Economics Papers: this item is included in nep-cmp
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1303.1334

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