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Please use this identifier to cite or link to this item: http://ntour.ntou.edu.tw:8080/ir/handle/987654321/43754

Title: A convergent quadratic-time lattice algorithm for pricing European-style Asian options
Authors: William Wei-Yuan Hsu
Yuh-Dauh Lyuu
Contributors: 國立臺灣海洋大學:資訊工程學系
NTOU:Department of Computer Science and Engineering
Keywords: Option pricing
Binomial model
Trinomial model
Path-dependent derivative
Asian option
Complexity
Lagrange multiplier
PDE
Lattice
Date: 2007
Issue Date: 2017-10-30T08:46:29Z
Publisher: Applied Mathematics and Computation
Abstract: Abstract:Asian options are strongly path-dependent derivatives. Although efficient numerical methods and approximate closed-form formulas are available, most lack convergence guarantees. Asian options can also be priced on the lattice. All efficient lattice algorithms keep only a polynomial number of states and use interpolation to compensate for the less than full representation of the states. Let the time to maturity be partitioned into n periods. This paper presents the first O(n2)-time convergent lattice algorithm for pricing European-style Asian options; it is the most efficient lattice algorithm with convergence guarantees. The algorithm relies on the Lagrange multipliers to choose optimally the number of states for each node of the lattice. The algorithm is also memory efficient. Extensive numerical experiments and comparison with existing PDE, analytical, and lattice methods confirm the performance claims and the competitiveness of our algorithm. This result places the problem of European-style Asian option pricing in the same complexity class as that of the vanilla option on the lattice.
Relation: 189(2), pp.1099–1123
URI: http://ntour.ntou.edu.tw:8080/ir/handle/987654321/43754
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