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Title: Valuing American Put Options Using Chebyshev Polynomial Approximation
Authors: Caporale, GM
Cerrato, M
Keywords: American Put Options, Bellman Equation, Chebyshev Polynomial;Approximation, Chebyshev Nodes
Issue Date: 2005
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 05-03
Abstract: This paper suggests a simple valuation method based on Chebyshev approximation at Chebyshev nodes to value American put options. It is similar to the approach taken in Sullivan (2000), where the option`s continuation region function is estimated by using a Chebyshev polynomial. However, in contrast to Sullivan (2000), the functional is fitted by using Chebyshev nodes. The suggested method is flexible, easy to program and efficient, and can be extended to price other types of derivative instruments. It is also applicable in other fields, providing efficient solutions to complex systems of partial differential equations. The paper also describes an alternative method based on dynamic programming and backward induction to approximate the option value in each time period.
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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