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dc.contributor.authorZhang, Kai
dc.contributor.authorTeo, Kok Lay
dc.contributor.authorSwartz, Mick
dc.date.accessioned2017-01-30T14:57:59Z
dc.date.available2017-01-30T14:57:59Z
dc.date.created2014-03-10T20:00:43Z
dc.date.issued2013
dc.identifier.citationZhang, K and Teo, K L and Swartz, M. 2013. A Robust Numerical Scheme for Pricing American Options Under Regime Switching Based on Penalty Method. Computational Economics. 43: pp. 463-483.
dc.identifier.urihttp://hdl.handle.net/20.500.11937/42188
dc.identifier.doi10.1007/s10614-013-9361-3
dc.description.abstract

This paper is devoted to develop a robust numerical method to solve a system of complementarity problems (CPs) arising from pricing American options under regime switching. Based on a penalty method, the system of complementarity problems are approximated by a set of coupled nonlinear partial differential equations (PDEs). We then introduce a fitted finite volume (FFVM) method for the spatial discretization along with a fully implicit time stepping scheme for the PDEs, which results in a system of nonlinear algebraic equations. We show that this scheme is consistent, stable and monotone, hence convergent. To solve the system of nonlinear equations effectively, an iterative solution method is established. The convergence of the solution method is shown. Numerical tests are performed to examine the convergence rate and verify the effectiveness and robustness of the new numerical scheme.

dc.publisherSpringer US
dc.subjectFinite Volume Method
dc.subjectAmerican Option Pricing
dc.subjectRegime Switching
dc.subjectPenalty Method
dc.titleA Robust Numerical Scheme for Pricing American Options Under Regime Switching Based on Penalty Method
dc.typeJournal Article
dcterms.source.volume43
dcterms.source.startPage463
dcterms.source.endPage483
dcterms.source.issn0927-7099
dcterms.source.titleComputational Economics
curtin.department
curtin.accessStatusFulltext not available


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