Error estimates for approximations of American put option price

DOI10.2478/CMAM-2012-0007zbMATH Open1284.65107arXiv1109.4032OpenAlexW2001192392MaRDI QIDQ2442033FDOQ2442033

Authors: David Šiška 

Publication date: 31 March 2014

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

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.

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

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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)

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• A new predictor-corrector scheme for valuing American puts
• On the binomial approximation of the American put
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• Estimation of error in finite-difference bisection algorithm of American options

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