2019/09/03 by Karel J. in ’t Hout, Hout, Karel J. in 't, Jacob Snoeijer +1
Economics, Econometrics and Finance · #FOS: Mathematics #Financial Markets and Investment Strategies #Monetary Policy and Economic Impact #Numerical Analysis (math.NA) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1909.01164
openalex publication_date 2019/09/03 · openalex created_date 2023/02/18 · openalex updated_date 2026/07/28
We study the principal component analysis (PCA) based approach introduced by\nReisinger & Wittum (2007) for the approximation of Bermudan basket option\nvalues via partial differential equations (PDEs). This highly efficient\napproximation approach requires the solution of only a limited number of\nlow-dimensional PDEs complemented with optimal exercise conditions. It is\ndemonstrated by ample numerical experiments that a common discretization of the\npertinent PDE problems yields a second-order convergence behaviour in space and\ntime, which is as desired. It is also found that this behaviour can be somewhat\nirregular, and insight into this phenomenon is obtained.\n