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Monte-Carlo methods for the pricing of American options: a semilinear BSDE point of view

Bruno Bouchard, Ki Chau, Arij Manai and Ahmed Sid-Ali
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Bruno Bouchard: CEREMADE
Ki Chau: CWI
Arij Manai: UM

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Abstract: We extend the viscosity solution characterization proved in [5] for call/put American option prices to the case of a general payoff function in a multi-dimensional setting: the price satisfies a semilinear re-action/diffusion type equation. Based on this, we propose two new numerical schemes inspired by the branching processes based algorithm of [8]. Our numerical experiments show that approximating the discontinu-ous driver of the associated reaction/diffusion PDE by local polynomials is not efficient, while a simple randomization procedure provides very good results.

New Economics Papers: this item is included in nep-cmp
Date: 2017-12, Revised 2018-11
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Handle: RePEc:arx:papers:1712.07383