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arXiv · 1303.1334

Pricing American options via multi-level approximation methods

Denis Belomestny·Fabian Dickmann·Tigran Nagapetyan
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Abstract

In this article we propose a novel approach to reduce the computational complexity of various approximation methods for pricing discrete time American options. Given a sequence of continuation values estimates corresponding to different levels of spatial approximation and time discretization, we propose a multi-level low biased estimate for the price of an American option. It turns out that the resulting complexity gain can be rather high and can even reach the order (\varepsilon^{-1}) with (\varepsilon) denoting the desired precision. The performance of the proposed multilevel algorithm is illustrated by a numerical example of pricing Bermudan max-call options.

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Denis Belomestny, Fabian Dickmann, Tigran Nagapetyan. 2013-12-25. Pricing American options via multi-level approximation methods. https://arxiv.org/abs/1303.1334

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