Computational Methods for Derivatives with Early Exercise Features

Chiarella, C; Kang, B; Meyer, G; Ziogas, A

Computational Methods for Derivatives with Early Exercise Features

Chiarella, C Kang, B Meyer, G Ziogas, A

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Publication Type:: Chapter
Citation:: Handbook of Computational Economics, 2014, 3 pp. 225 - 275
Issue Date:: 2014-01-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Kang, B	en_US
dc.contributor.author	Meyer, G	en_US
dc.contributor.author	Ziogas, A	en_US
dc.date.issued	2014-01-01	en_US
dc.identifier.citation	Handbook of Computational Economics, 2014, 3 pp. 225 - 275	en_US
dc.identifier.uri	http://hdl.handle.net/10453/34467
dc.description.abstract	In this paper we consider various computational methods for pricing American style derivatives. We do so under both jump diffusion and stochastic volatility processes. We consider integral transform methods, the method of lines, operator-splitting, and the Crank-Nicolson scheme, the latter being used to generate the benchmark solution. Overall, we find that the method of lines approach is quite competitive with other methods for the problems considered in this paper. As one goes to higher dimensions it may be necessary to use methods such as the sparse grid approach. © 2014 Elsevier B.V.	en_US
dc.relation.ispartof	Handbook of Computational Economics	en_US
dc.relation.isbasedon	10.1016/B978-0-444-52980-0.00005-0	en_US
dc.subject.classification	Economics	en_US
dc.title	Computational Methods for Derivatives with Early Exercise Features	en_US
dc.type	Chapter
utslib.citation.volume	3	en_US
utslib.for	010302 Numerical Solution of Differential and Integral Equations	en_US
utslib.for	010401 Applied Statistics	en_US
utslib.for	010205 Financial Mathematics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US
pubs.volume	3	en_US

Abstract:

In this paper we consider various computational methods for pricing American style derivatives. We do so under both jump diffusion and stochastic volatility processes. We consider integral transform methods, the method of lines, operator-splitting, and the Crank-Nicolson scheme, the latter being used to generate the benchmark solution. Overall, we find that the method of lines approach is quite competitive with other methods for the problems considered in this paper. As one goes to higher dimensions it may be necessary to use methods such as the sparse grid approach. © 2014 Elsevier B.V.

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http://hdl.handle.net/10453/34467