Pricing American options via multi-level approximation methods

2013/03/06 by Denis Belomestny, Belomestny, Denis, Fabian Dickmann +3
Business, Management and Accounting · Economics, Econometrics and Finance · #62L15 #65C05 #Advanced Queuing Theory Analysis #Capital Investment and Risk Analysis #Computational Finance (q-fin.CP) #FOS: Economics and business #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.1303.1334

openalex publication_date 2013/03/06 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

In this article we propose a novel approach to reduce the computational complexity of various approximation methods for pricing discrete time American options. Given a sequence of continuation values estimates corresponding to different levels of spatial approximation and time discretization, we propose a multi-level low biased estimate for the price of an American option. It turns out that the resulting complexity gain can be rather high and can even reach the order (ε^-1) with (ε) denoting the desired precision. The performance of the proposed multilevel algorithm is illustrated by a numerical example of pricing Bermudan max-call options.

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