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On the Use of Policy Iteration as an Easy Way of Pricing American Options

Abstract:

In this paper, we demonstrate that policy iteration, introduced in the context of HJB equations in [P. A. Forsyth and G. Labahn, J. Comput. Finance, 11 (2007), pp. 1-44], is an extremely simple generic algorithm for solving linear complementarity problems (LCPs) resulting from the finite difference and finite element approximation of American options. We show that, in general, O(N) is an upper and a lower bound on the number of iterations needed to solve a discrete LCP of size N. If embedded ...

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Publication status:
Published

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Publisher copy:
10.1137/110823328

Authors


Reisinger, C More by this author
Publication date:
2012
DOI:
EISSN:
1945-497X
ISSN:
1945-497X
URN:
uuid:6614c16b-e18f-4423-8e50-f77269161d76
Source identifiers:
199576
Local pid:
pubs:199576

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