MODEL REDUCTION METHODS IN OPTION PRICING

Antonio Falcó (), Francisco Chinesta () and Mariano Gonzalez Sanchez
Additional contact information
Antonio Falcó: Universidad CEU Cardenal Herrera
Francisco Chinesta: CNRS-ENSAM-ESEM

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: In this work we introduce the Proper Orthogonal Decomposition (POD)approach to the valuation of contingent claims for one–dimensional price models.First, we present the POD in the context of an abstract Hilbert space and we givean application for the numerical pricing of Double Barrier Options. In a finitedimension setting, we show the model reduction method for Finite Differenceschemes of implicit type. In particular, we construct the reduced version of theCrank–Nicolson scheme and some numerical examples are given.

Keywords: Model Reduction; Proper Orthogonal Decomposition; Finite Difference Schemes; Crank–Nicolson Scheme. (search for similar items in EconPapers)
JEL-codes: G34 M14 M42 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-07
New Economics Papers: this item is included in nep-fin
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http://www.ivie.es/downloads/docs/wpasad/wpasad-2006-16.pdf Fisrt version / Primera version, 2006 (application/pdf)

Related works:
Working Paper: Model Reduction Methods in Option Pricing (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2006-16

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