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Title
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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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Source (journal)
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Computational and Applied Mathematics
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Publication
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2018
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ISSN
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0101-8205
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DOI
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10.1007/S40314-017-0457-6
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Volume/pages
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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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