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Title: Power penalty approach to American options pricing under regime switching
Authors: Zhang, K
Yang, X 
Keywords: American option pricing
Regime switching
Differential complementarity problem
Power penalty method
Convergence analysis
Issue Date: Oct-2018
Publisher: Springer
Source: Journal of optimization theory and applications, Oct. 2018, v. 179, no. 1, p. 311-331 How to cite?
Journal: Journal of optimization theory and applications 
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.
ISSN: 0022-3239
EISSN: 1573-2878
DOI: 10.1007/s10957-018-1299-0
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