On the efficient application of the repeated Richardson extrapolation technique to option pricing

Luca Barzanti (), Corrado Corradi () and Martina Nardon ()

No 147, Working Papers from Department of Applied Mathematics, Università Ca' Foscari Venezia

Abstract: Richardson extrapolation (RE) is a commonly used technique in financial applications for accelerating the convergence of numerical methods. Particularly in option pricing, it is possible to refine the results of several approaches by applying RE, in order to avoid the difficulties of employing slowly converging schemes. But the effectiveness of such a technique is fully achieved when its repeated version (RRE) is applied. Nevertheless, its application in financial literature is pretty rare. This is probably due to the necessity to pay special attention to the numerical aspects of its implementation, such as the choice of both the sequence of the stepsizes and the order of the method. In this contribution, we consider several numerical schemes for the valuation of American options and investigate the possibility of an appropriate application of RRE. As a result, we find that, in the analyzed approaches in which the convergence is monotonic, RRE can be used as an effective tool for improving significantly the accuracy.

Keywords: Richardson extrapolation; repeated Richardson extrapolation; American options; randomization technique; flexible binomial method (search for similar items in EconPapers)
JEL-codes: C15 C63 G13 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2006-11
New Economics Papers: this item is included in nep-cfn
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