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

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  • Erhan Bayraktar
  • Hao Xing

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. Copyright Springer-Verlag 2009

Suggested Citation

  • Erhan Bayraktar & Hao Xing, 2009. "Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 70(3), pages 505-525, December.
    • Handle: RePEc:spr:mathme:v:70:y:2009:i:3:p:505-525
    DOI: 10.1007/s00186-008-0282-1
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    References listed on IDEAS

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    Cited by:

    1. Markus Leippold & Nikola Vasiljević, 2020. "Option-Implied Intrahorizon Value at Risk," Management Science, INFORMS, vol. 66(1), pages 397-414, January.

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