Error estimates for approximations of American put option price

DOI10.2478/CMAM-2012-0007MaRDI QIDQ2442033zbMATH OpenOpenAlexFDO

Authors David Šiška

Publication date 31 March 2014

Published in Computational Methods in Applied Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1109.4032

zbMATH Keywords

finite difference methodHamilton-Jacobi-Bellman equationoptimal controloptimal stoppingAmerican put option

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Free boundary problems for PDEs (35R35) Stopping times; optimal stopping problems; gambling theory (60G40) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Stability and convergence of numerical methods for initial value and initial-boundary value problems involving PDEs (65M12) Financial applications of other theories (91G80)

Abstract: Finite difference approximations to multi-asset American put option price are considered. The assets are modelled as a multi-dimensional diffusion process with variable drift and volatility. Approximation error of order one quarter with respect to the time discretisation parameter and one half with respect to the space discretisation parameter is proved by reformulating the corresponding optimal stopping problem as a solution of a degenerate Hamilton-Jacobi-Bellman equation. Furthermore, the error arising from restricting the discrete problem to a finite grid by reducing the original problem to a bounded domain is estimated.

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(11)

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• Error estimates for binomial approximations of game put options
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