A numerical method for pricing European options with proportional transaction costs
In the paper,we propose a numerical technique based on a finite difference scheme in space and an implicit time-stepping scheme for solving the Hamilton–Jacobi–Bellman (HJB) equation arising from the penalty formulation of the valuation ofEuropean options with proportional transaction costs. We show...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Conference Paper |
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Kluwer Academic Publishers
2014
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| Subjects: | |
| Online Access: | http://hdl.handle.net/20.500.11937/10608 |
| _version_ | 1848747580396142592 |
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| author | Li, W. Wang, Song |
| author2 | Adil Bagirov |
| author_facet | Adil Bagirov Li, W. Wang, Song |
| author_sort | Li, W. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | In the paper,we propose a numerical technique based on a finite difference scheme in space and an implicit time-stepping scheme for solving the Hamilton–Jacobi–Bellman (HJB) equation arising from the penalty formulation of the valuation ofEuropean options with proportional transaction costs. We show that the approximate solution from the numerical scheme converges to the viscosity solution of the HJB equation as the mesh sizes in space and time approach zero. We also propose an iterative scheme for solving the nonlinear algebraic system arising from the discretization and establish a convergence theory for the iterative scheme. Numerical experiments are presented to demonstrate the robustness and accuracy of the method. |
| first_indexed | 2025-11-14T06:51:24Z |
| format | Conference Paper |
| id | curtin-20.500.11937-10608 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T06:51:24Z |
| publishDate | 2014 |
| publisher | Kluwer Academic Publishers |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-106082023-02-13T08:01:37Z A numerical method for pricing European options with proportional transaction costs Li, W. Wang, Song Adil Bagirov Kaisa Miettinen Gerhard-Wilhelm Weber Optimal feedback control Complementarity problems Convergence Global optimizer European option pricing Finite difference method HJB equations In the paper,we propose a numerical technique based on a finite difference scheme in space and an implicit time-stepping scheme for solving the Hamilton–Jacobi–Bellman (HJB) equation arising from the penalty formulation of the valuation ofEuropean options with proportional transaction costs. We show that the approximate solution from the numerical scheme converges to the viscosity solution of the HJB equation as the mesh sizes in space and time approach zero. We also propose an iterative scheme for solving the nonlinear algebraic system arising from the discretization and establish a convergence theory for the iterative scheme. Numerical experiments are presented to demonstrate the robustness and accuracy of the method. 2014 Conference Paper http://hdl.handle.net/20.500.11937/10608 10.1007/s10898-014-0155-5 Kluwer Academic Publishers restricted |
| spellingShingle | Optimal feedback control Complementarity problems Convergence Global optimizer European option pricing Finite difference method HJB equations Li, W. Wang, Song A numerical method for pricing European options with proportional transaction costs |
| title | A numerical method for pricing European options with proportional transaction costs |
| title_full | A numerical method for pricing European options with proportional transaction costs |
| title_fullStr | A numerical method for pricing European options with proportional transaction costs |
| title_full_unstemmed | A numerical method for pricing European options with proportional transaction costs |
| title_short | A numerical method for pricing European options with proportional transaction costs |
| title_sort | numerical method for pricing european options with proportional transaction costs |
| topic | Optimal feedback control Complementarity problems Convergence Global optimizer European option pricing Finite difference method HJB equations |
| url | http://hdl.handle.net/20.500.11937/10608 |