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Finite difference methods for pricing American put option with rationality parameter: Numerical analysis and computing

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Finite difference methods for pricing American put option with rationality parameter: Numerical analysis and computing

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dc.contributor.author Company Rossi, Rafael es_ES
dc.contributor.author Egorova, Vera es_ES
dc.contributor.author Jódar Sánchez, Lucas Antonio es_ES
dc.contributor.author Vázquez, Carlos es_ES
dc.date.accessioned 2017-09-22T12:17:51Z
dc.date.available 2017-09-22T12:17:51Z
dc.date.issued 2016-10
dc.identifier.issn 0377-0427
dc.identifier.uri http://hdl.handle.net/10251/87841
dc.description.abstract [EN] In this paper finite difference methods for pricing American option with rationality parameter are proposed. The irrational exercise policy arising in American options is characterized in terms of a rationality parameter. The model is formulated in terms of a new nonlinear Black Scholes equation that requires specific numerical methods. Although the solution converges to the solution of the classical American option price when the parameter tends to infinity, for finite values of the parameter the classical boundary conditions cannot apply and we propose specific ones. A logarithmic transformation is used to improve properties of the numerical solution that is constructed by explicit finite difference method. Numerical analysis provides stability conditions for the methods and its positivity. Properties of intensity function are studied from the point of view of numerical solution. Concerning the numerical methods for the original problem we propose the θ-method for time discretization, thus including explicit, fully implicit and Crank Nicolson schemes as particular cases. The nonlinear term is treated by a Newton method. The convergence rate is illustrated by numerical examples. es_ES
dc.description.sponsorship This work has been partially supported by the European Union in the FP7- PEOPLE-2012-ITN program under Grant Agreement Number 304617 (FP7 Marie Curie Action, Project Multi-ITN STRIKE-Novel Methods in Computational Finance) and the Ministerio de Economia y Competitividad Spanish grant MTM2013-41765-P. Fourth author has been partially funded by grant MTM2013-47800-C2-1-P. en_EN
dc.language Inglés es_ES
dc.publisher Elsevier es_ES
dc.relation MINECO/MTM2013-41765-P
dc.relation MINECO/MTM2013-47800-C2-1-P
dc.relation.ispartof Journal of Computational and Applied Mathematics es_ES
dc.rights Reserva de todos los derechos es_ES
dc.subject American option es_ES
dc.subject Irrational exercise es_ES
dc.subject Nonlinear Black Scholes equations es_ES
dc.subject Finite difference method es_ES
dc.subject Numerical analysis es_ES
dc.subject.classification MATEMATICA APLICADA es_ES
dc.title Finite difference methods for pricing American put option with rationality parameter: Numerical analysis and computing es_ES
dc.type Artículo es_ES
dc.identifier.doi 10.1016/j.cam.2016.03.001
dc.relation.projectID info:eu-repo/grantAgreement/EC/FP7/304617/EU
dc.rights.accessRights Cerrado es_ES
dc.contributor.affiliation Universitat Politècnica de València. Escuela Técnica Superior de Ingenieros de Caminos, Canales y Puertos - Escola Tècnica Superior d'Enginyers de Camins, Canals i Ports es_ES
dc.contributor.affiliation Universitat Politècnica de València. Instituto Universitario de Matemática Multidisciplinar - Institut Universitari de Matemàtica Multidisciplinària es_ES
dc.contributor.affiliation Universitat Politècnica de València. Facultad de Administración y Dirección de Empresas - Facultat d'Administració i Direcció d'Empreses es_ES
dc.description.bibliographicCitation Company Rossi, R.; Egorova, V.; Jódar Sánchez, LA.; Vázquez, C. (2016). Finite difference methods for pricing American put option with rationality parameter: Numerical analysis and computing. Journal of Computational and Applied Mathematics. 304:1-17. https://doi.org/10.1016/j.cam.2016.03.001 es_ES
dc.description.accrualMethod S es_ES
dc.relation.publisherversion http://dx.doi.org/10.1016/j.cam.2016.03.001 es_ES
dc.description.upvformatpinicio 1 es_ES
dc.description.upvformatpfin 17 es_ES
dc.type.version info:eu-repo/semantics/publishedVersion es_ES
dc.description.volume 304 es_ES
dc.relation.senia 305447 es_ES
dc.identifier.eissn 1879-1778
dc.contributor.funder Ministerio de Economía y Competitividad
dc.contributor.funder European Commission


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