2011
DOI: 10.1137/110820920
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Methods for Pricing American Options under Regime Switching

Abstract: Abstract. We analyze a number of techniques for pricing American options under a regime switching stochastic process. The techniques analyzed include both explicit and implicit discretizations with the focus being on methods which are unconditionally stable. In the case of implicit methods we also compare a number of iterative procedures for solving the associated nonlinear algebraic equations. Numerical tests indicate that a fixed point policy iteration, coupled with a direct control formulation, is a reliabl… Show more

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Cited by 63 publications
(39 citation statements)
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“…Finally, in the last case we assign toũ n li,j = 0 due to condition (18). From the properties of the model for any regime i one gets…”
Section: Discretization and Numerical Schemes Constructionmentioning
confidence: 99%
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“…Finally, in the last case we assign toũ n li,j = 0 due to condition (18). From the properties of the model for any regime i one gets…”
Section: Discretization and Numerical Schemes Constructionmentioning
confidence: 99%
“…Using the absence of arbitrage principle, the initial cost of constructing the portfolio, typically given by a partial differential equation (PDE), is then considered to be the fair value of the derivative, [18].…”
Section: Introductionmentioning
confidence: 99%
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“…Using the absence of arbitrage principle, the initial cost of constructing the portfolio, typically given by a partial differential equation (PDE), is then considered to be the fair value of the derivative, [57].…”
Section: Numerical Examplesmentioning
confidence: 99%
“…Lattice methods [87,114] are popular for practitioners because they are easy to implement, but they have the drawback of the absence of numerical analysis and subsequent unreliability, because the lack of numerical analysis may waste the best model. The penalty method [57,70,71,116] uses a coupling of the penalty term and the regime coupling terms. Both, the lattice and penalty methods do not calculate the optimal stopping boundary that has interest from the practitioners point of view.…”
Section: Regime Switching Modelmentioning
confidence: 99%