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Title
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Numerical valuation of Bermudan basket options via partial differential equations
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Author
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Abstract
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| We study the principal component analysis (PCA) based approach introduced by Reisinger and Wittum [Efficient hierarchical approximation of high-dimensional option pricing problems, SIAM J. Sci. Comp. 29 (2007), pp. 440–458] for the approximation of Bermudan basket option values via partial differential equations (PDEs). This highly efficient approximation approach requires the solution of only a limited number of low-dimensional PDEs complemented with optimal exercise conditions. It is demonstrated by ample numerical experiments that a common discretization of the pertinent PDE problems yields a second-order convergence behaviour in space and time, which is as desired. It is also found that this behaviour can be somewhat irregular, and insight into this phenomenon is obtained. |
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Language
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English
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Source (journal)
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International journal of computer mathematics. - London
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Publication
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London
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2021
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ISSN
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0020-7160
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DOI
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10.1080/00207160.2020.1786542
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Volume/pages
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98
:4
(2021)
, p. 829-844
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ISI
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000547420200001
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Full text (Publisher's DOI)
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Full text (open access)
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