Please use this identifier to cite or link to this item:
http://hdl.handle.net/10397/80845
Title: | Power penalty approach to American options pricing under regime switching | Authors: | Zhang, K Yang, X |
Issue Date: | Oct-2018 | Source: | Journal of optimization theory and applications, Oct. 2018, v. 179, no. 1, p. 311-331 | Abstract: | This work aims at studying a power penalty approach to the coupled system of differential complementarity problems arising from the valuation of American options under regime switching. We introduce a power penalty method to approximate the differential complementarity problems, which results in a set of coupled nonlinear partial differential equations. By virtue of variational inequality theory, we establish the unique solvability of the system of differential complementarity problems. Moreover, the convergence property of this power penalty method in an appropriate infinite-dimensional space is explored, where an exponential convergence rate of the power penalty method is established and the monotonic convergence of the penalty method with respect to the penalty parameter is shown. Finally, some numerical experiments are presented to verify the convergence property of the power penalty method. | Keywords: | American option pricing Regime switching Differential complementarity problem Power penalty method Convergence analysis |
Publisher: | Springer | Journal: | Journal of optimization theory and applications | ISSN: | 0022-3239 | EISSN: | 1573-2878 | DOI: | 10.1007/s10957-018-1299-0 | Rights: | © Springer Science+Business Media, LLC, part of Springer Nature 2018 This version of the article has been accepted for publication, after peer review (when applicable) and is subject to Springer Nature’s AM terms of use (https://www.springernature.com/gp/open-research/policies/accepted-manuscript-terms), but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record is available online at: http://dx.doi.org/10.1007/s10957-018-1299-0 |
Appears in Collections: | Journal/Magazine Article |
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Yang_Power_Penalty_Approach.pdf | Pre-Published version | 725.67 kB | Adobe PDF | View/Open |
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