An FBSDE approach to American option pricing with an interacting particle method

DOI10.1007/S10690-014-9195-6zbMATH Open1368.91181arXiv1211.5867OpenAlexW3125080487MaRDI QIDQ2013320FDOQ2013320

Authors: Masaaki Fujii, Seisho Sato, Akihiko Takahashi 

Publication date: 17 August 2017

Published in: Asia-Pacific Financial Markets (Search for Journal in Brave)

Abstract: In the paper, we propose a new calculation scheme for American options in the framework of a forward backward stochastic differential equation (FBSDE). The well-known decomposition of an American option price with that of a European option of the same maturity and the remaining early exercise premium can be cast into the form of a decoupled non-linear FBSDE. We numerically solve the FBSDE by applying an interacting particle method recently proposed by Fujii and Takahashi (2012d), which allows one to perform a Monte Carlo simulation in a fully forward-looking manner. We perform the fourth-order analysis for the Black-Scholes (BS) model and the third-order analysis for the Heston model. The comparison to those obtained from existing tree algorithms shows the effectiveness of the particle method.

Full work available at URL: https://arxiv.org/abs/1211.5867

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zbMATH Keywords

asymptotic expansionparticle methodperturbationBSDEFBSDE

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Stopping times; optimal stopping problems; gambling theory (60G40) Numerical solutions to stochastic differential and integral equations (65C30) Stochastic particle methods (65C35)

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Cited In (6)

• American Option Valuation with Particle Filters
• An asymptotic expansion for forward-backward SDEs: a Malliavin calculus approach
• Asymptotic expansion approach in finance
• Numerical methods for backward stochastic differential equations: a survey
• Pricing and exercising American options: an asymptotic expansion approach
• Perturbative expansion technique for non-linear FBSDEs with interacting particle method

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