Adaptive lattice methods for multi-asset models

Kyoung Sook Moon, Won Jung Kim, Hongjoong Kim

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

Adaptive lattice methods are developed to compute the price of multivariate contingent claims. A simple coordinate representation is used to extend one dimensional lattice methods to multivariate asset models. Two algorithms are proposed, one performing several levels of refinement for a time interval [T - Δ t, T] and the other performing one level of refinement for λ % of a given time domain [0, T], where T is the time to maturity, Δ t is the time step size and λ > 0 is a constant. Numerical experiments are carried out for the European and American barrier-type options with one, two, or three underlying assets. In our numerical experiments, both adaptive algorithms improve efficiency over lattice methods with a uniform time step for the same level of accuracy.

Original languageEnglish
Pages (from-to)352-366
Number of pages15
JournalComputers and Mathematics with Applications
Volume56
Issue number2
DOIs
Publication statusPublished - 2008 Jul

Keywords

  • Adaptive mesh refinement
  • Lattice method
  • Multi-asset option pricing

ASJC Scopus subject areas

  • Modelling and Simulation
  • Computational Theory and Mathematics
  • Computational Mathematics

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