A variation of the Canadisation algorithm for the pricing of American options driven by Lévy processes

DOI10.1016/J.SPA.2015.03.003zbMATH Open1334.60064arXiv1304.4534OpenAlexW1992917352MaRDI QIDQ2347464FDOQ2347464

Authors: Florian Kleinert, Kees van Schaik 

Publication date: 27 May 2015

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: We introduce an algorithm for the pricing of finite expiry American options driven by L'evy processes. The idea is to tweak Carr's `Canadisation' method, cf. Carr [9] (see also Bouchard et al [5]), in such a way that the adjusted algorithm is viable for any L'evy process whose law at an independent, exponentially distributed time consists of a (possibly infinite) mixture of exponentials. This includes Brownian motion plus (hyper)exponential jumps, but also the recently introduced rich class of so-called meromorphic L'evy processes, cf. Kyprianou et al [16]. This class contains all L'evy processes whose L'evy measure is an infinite mixture of exponentials which can generate both finite and infinite jump activity. L'evy processes well known in mathematical finance can in a straightforward way be obtained as a limit of meromorphic L'evy processes. We work out the algorithm in detail for the classic example of the American put, and we illustrate the results with some numerics.

Full work available at URL: https://arxiv.org/abs/1304.4534

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zbMATH Keywords

optimal stoppingAmerican optionsLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40) Financial applications of other theories (91G80)

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Cited In (3)

• American options under stochastic volatility: control variates, maturity randomization \& multiscale asymptotics
• Randomisation and recursion methods for mixed-exponential Lévy models, with financial applications
• Predicting the time at which a Lévy process attains its ultimate supremum

Uses Software

• Digital Library of Mathematical Functions

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