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Numerical valuation of Bermudan basket options via partial differential equations (1909.01164v1)

Published 3 Sep 2019 in math.NA and cs.NA

Abstract: We study the principal component analysis (PCA) based approach introduced by Reisinger & Wittum (2007) for the approximation of Bermudan basket option values via partial differential equations (PDEs). This highly efficient approximation approach requires the solution of only a limited number of low-dimensional PDEs complemented with optimal exercise conditions. It is demonstrated by ample numerical experiments that a common discretization of the pertinent PDE problems yields a second-order convergence behaviour in space and time, which is as desired. It is also found that this behaviour can be somewhat irregular, and insight into this phenomenon is obtained.

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