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Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions

Bayraktar, Erhan and Xing, Hao (2009) Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions. Mathematical Methods of Operations Research, 70 (3). pp. 505-525. ISSN 1432-2994

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Identification Number: 10.1007/s00186-008-0282-1

Abstract

We approximate the price of the American put for jump diffusions by a sequence of functions, which are computed iteratively. This sequence converges to the price function uniformly and exponentially fast. Each element of the approximating sequence solves an optimal stopping problem for geometric Brownian motion, and can be numerically computed using the classical finite difference methods. We prove the convergence of this numerical scheme and present examples to illustrate its performance.

Item Type: Article
Official URL: http://www.springerlink.com/content/1432-2994/
Additional Information: © 2009 Springer
Subjects: H Social Sciences > HA Statistics
Sets: Departments > Statistics
Date Deposited: 28 Jan 2011 15:47
Last Modified: 28 Jan 2011 15:47
URI: http://eprints.lse.ac.uk/id/eprint/31872

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