55 Pages Posted: 27 May 2014
Date Written: May 26, 2014
This paper proposes novel lattice algorithms to compute tail conditional expectation of European calls and puts in linear time. We incorporate the technique of prefix-sum into tilting, trinomial, and extrapolation algorithms as well as some syntheses of these algorithms. Furthermore, we introduce fractional-step lattices to help reduce interpolation error in the extrapolation algorithms. We demonstrate the efficiency and accuracy of these algorithms with numerical results. A key finding is that combining the techniques of tilting lattice, extrapolation, and fractional steps substantially increases speed and accuracy.
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Suggested Citation: Suggested Citation
Chen, Bryant and Hsu, William W.Y. and Ho, Jan-Ming and Kao, Ming-Yang, Linear-Time Accurate Lattice Algorithms for Tail Conditional Expectation (May 26, 2014). Algorithmic Finance 2014, 3:1-2, 87-140. Available at SSRN: https://ssrn.com/abstract=2441817