The Regularization Method for a Degenerate Parabolic Variational Inequality Arising from American Option Valuation
Year: 2008
International Journal of Numerical Analysis and Modeling, Vol. 5 (2008), Iss. 2 : pp. 222–238
Abstract
In this paper, we present a regularization method to a degenerate variational inequality of parabolic type arising from American option pricing. Main difficulty in actually analyzing this kind of problem is caused by the presence of a non-smoothing initial value function in the formulation of the problem. We first use a smoothing technique with small parameter $\varepsilon > 0$ to non-smoothing initial value function; and then we derive the error estimates for regularized continuous problem and regularized discrete problem, respectively. Numerical tests are given to confirm our theoretical results.
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Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/2008-IJNAM-808
International Journal of Numerical Analysis and Modeling, Vol. 5 (2008), Iss. 2 : pp. 222–238
Published online: 2008-01
AMS Subject Headings: Global Science Press
Copyright: COPYRIGHT: © Global Science Press
Pages: 17
Keywords: regularization method variational inequality American option valuation finite element and error estimates.