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    A numerical method for pricing European options with proportional transaction costs

    Access Status
    Fulltext not available
    Authors
    Li, W.
    Wang, Song
    Date
    2014
    Type
    Conference Paper
    
    Metadata
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    Citation
    Li, W. and Wang, S. 2014. A numerical method for pricing European options with proportional transaction costs, in Adil Bagirov, Kaisa Miettinen, Gerhard-Wilhelm Weber (ed), 25th European Conference on Operational Research (EURO XXV 2012), Jul 8 2012, pp. 59-78. Vilnius, Lithuania: Kluwer Academic Publishers.
    Source Title
    Journal of Global Optimization, Volume 60, Issue 1, September 2014: Special issue dedicated to the 25th European conference on operational research (EURO XXV 2012)
    Source Conference
    25th European Conference on Operational Research (EURO XXV 2012)
    DOI
    10.1007/s10898-014-0155-5
    ISSN
    0925-5001
    URI
    http://hdl.handle.net/20.500.11937/10608
    Collection
    • Curtin Research Publications
    Abstract

    In the paper,we propose a numerical technique based on a finite difference scheme in space and an implicit time-stepping scheme for solving the Hamilton–Jacobi–Bellman (HJB) equation arising from the penalty formulation of the valuation ofEuropean options with proportional transaction costs. We show that the approximate solution from the numerical scheme converges to the viscosity solution of the HJB equation as the mesh sizes in space and time approach zero. We also propose an iterative scheme for solving the nonlinear algebraic system arising from the discretization and establish a convergence theory for the iterative scheme. Numerical experiments are presented to demonstrate the robustness and accuracy of the method.

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