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A two-grid penalty method for American options
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| Author |
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| Abstract |
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| In this paper we consider the pricing of American options, governed by a partial differential complementarity problem. The differential problem is first approximated by a semi-linear PDE using two distinct penalty approaches which are well known in computational finance. We then initiate the two-grid algorithm by solving the nonlinear problem on a coarse grid and further the linearized in the interpolated coarse-grid solution problem on a fine grid. By means of the maximum principle the algorithm is shown to be of fourth order convergence rate in space. Numerical experiments verify the presented two-grid approach where we draw some interesting conclusions. |
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| Language |
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English
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Computational and Applied Mathematics |
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| Publication |
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2018
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0101-8205
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37:3(2018), p. 2381-2398
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| ISI |
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000438312300001
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| Full text (Publisher's DOI) |
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| Full text (publisher's version - intranet only) |
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