Corrected random walk approximations to free boundary problems in optimal stopping

Tze Leung Lai · Yi‐Ching Yao · Farid AitSahlia

18 citations0/0 files storedAdvances in Applied Probability

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Stochastic processes and financial applications Probability and Statistical Research Probability and Risk Models

Abstract

Corrected random walk approximations to continuous-time optimal stopping boundaries for Brownian motion, first introduced by Chernoff and Petkau, have provided powerful computational tools in option pricing and sequential analysis. This paper develops the theory of these second-order approximations and describes some new applications.

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References

1979Option pricing: A simplified approach 1998Methods of Mathematical Finance 1980Controlled Diffusion Processes 2006Optimal stopping and free-boundary problems 1998Methods of Mathematical Finance 1991Optimal Stopping and the American Put 1992ALTERNATIVE CHARACTERIZATIONS OF AMERICAN PUT OPTIONS 1997A Continuity Correction for Discrete Barrier Options

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