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Valuing American options using fast recursive projections

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  • Cosma, Antonio
  • Galluccio, Stefano
  • Scaillet, Olivier

Abstract

This paper introduces a new numerical option pricing method by fast recursive projections. The projection step consists in representing the payoff and the state price density with a fast discrete transform based on a simple grid sampling. The recursive step consists in transmitting coefficients of the representation from one date to the previous one by an explicit recursion formula. We characterize the convergence rate of the computed option price. Numerical illustrations with different American and Bermudan payoffs with discrete dividend paying stocks in the Black-Scholes and Heston models show that the method is fast, accurate, and general.

Suggested Citation

  • Cosma, Antonio & Galluccio, Stefano & Scaillet, Olivier, 2012. "Valuing American options using fast recursive projections," Working Papers unige:41856, University of Geneva, Geneva School of Economics and Management.
    • Handle: RePEc:gnv:wpgsem:unige:41856
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    More about this item

    Keywords

    Option pricing; American option; Bermudan option; Discrete transform; Discrete dividend paying stock; Numerical techniques;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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