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Numerical valuation of Bermudan basket options via partial differential equations

Tijdschriftbijdrage - Tijdschriftartikel

We study the principal component analysis (PCA) based approach introduced by Reisinger and Wittum [Efficient hierarchical approximation of high-dimensional option pricing problems, SIAM J. Sci. Comp. 29 (2007), pp. 440–458] for the approximation of Bermudan basket option values via partial differential equations (PDEs). This highly efficient approximation approach requires the solution of only a limited number of low-dimensional PDEs complemented with optimal exercise conditions. It is demonstrated by ample numerical experiments that a common discretization of the pertinent PDE problems yields a second-order convergence behaviour in space and time, which is as desired. It is also found that this behaviour can be somewhat irregular, and insight into this phenomenon is obtained.
Tijdschrift: International journal of computer mathematics
ISSN: 0020-7160
Volume: 98
Pagina's: 829 - 844
Jaar van publicatie:2021
Trefwoorden:A1 Journal article