EconPapers    
Economics at your fingertips  
 

Explicit RKF-Compact Scheme for Pricing Regime Switching American Options with Varying Time Step

Chinonso Nwankwo and Weizhong Dai

Papers from arXiv.org

Abstract: In this research work, an explicit Runge-Kutta-Fehlberg (RKF) time integration with a fourth-order compact finite difference scheme in space and a high order analytical approximation of the optimal exercise boundary is employed for solving the regime-switching pricing model. In detail, we recast the free boundary problem into a system of nonlinear partial differential equations with a multi-fixed domain. We then introduce a transformation based on the square root function with a Lipschitz character from which a high order analytical approximation is obtained to compute the derivative of the optimal exercise boundary in each regime. We further compute the boundary values, asset option, and the option Greeks for each regime using fourth-order spatial discretization and adaptive time integration. In particular, the coupled assets options and option Greeks are estimated using Hermite interpolation with Newton basis. Finally, a numerical experiment is carried out with two- and four-regimes examples and results are compared with the existing methods. The results obtained from the numerical experiment show that the present method provides better performance in terms of computational speed and more accurate solutions with a large step size.

Date: 2020-12, Revised 2021-07
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://arxiv.org/pdf/2012.09820 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2012.09820

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().

 
Page updated 2021-07-27
Handle: RePEc:arx:papers:2012.09820