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A spectral-collocation method for pricing perpetual American puts with stochastic volatility
Faculty of Informatics - Papers (Archive)
  • Song-Ping Zhu, University of Wollongong
  • Wenting Chen, University of Wollongong
RIS ID
37955
Publication Date
1-1-2011
Publication Details

Zhu, S. & Chen, W. (2011). A spectral-collocation method for pricing perpetual American puts with stochastic volatility. Applied Mathematics and Computation, 217 (22), 9033-9040.

Abstract
Based on the Legendre pseudospectral method, we propose a numerical treatment for pricing perpetual American put option with stochastic volatility. In this simple approach, a nonlinear algebraic equation system is first derived, and then solved by the Gauss–Newton algorithm. The convergence of the current scheme is ensured by constructing a test example similar to the original problem, and comparing the numerical option prices with those produced by the classical Projected SOR (PSOR) method. The results of our numerical experiments suggest that the proposed scheme is both accurate and efficient, since the spectral accuracy can be easily achieved within a small number of iterations. Moreover, based on the numerical results, we also discuss the impact of stochastic volatility term on the prices of perpetual American puts.
Citation Information
Song-Ping Zhu and Wenting Chen. "A spectral-collocation method for pricing perpetual American puts with stochastic volatility" (2011) p. 9033 - 9040
Available at: http://works.bepress.com/wchen/1/