1. Stochastic approximation methods for American type options.
- Author
-
Silvestrov, Dmitrii and Li, Yanxiong
- Subjects
STOCHASTIC approximation ,OPTIONS (Finance) ,DISCONTINUOUS functions ,PRICING ,DISTRIBUTION (Economic theory) ,RANDOM walks - Abstract
Stochastic approximation methods for rewards of American type options are studied. Pay-off functions are non random possibly discontinuous functions or random càdlàg functions. General conditions of convergence for binomial, trinomial, and skeleton reward approximations are formulated. Underlying log-price processes are assumed to be random walks. These processes are approximated by log-price processes given by random walks with discrete distributions of jumps. Backward recurrence algorithms for computing of reward functions for approximating log-price processes are given. These approximation algorithms and their rates of convergence are numerically tested for log-price processes represented by Gaussian and compound Gaussian random walks. Comparison of the above approximation methods is made. [ABSTRACT FROM PUBLISHER]
- Published
- 2016
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