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Recombining Tree Approximations for Optimal Stopping for Diffusions

27 Pages Posted: 1 Mar 2017  

Erhan Bayraktar

University of Michigan at Ann Arbor - Department of Mathematics

Yan Dolinsky

ETH Zürich

Jia Guo

University of Michigan at Ann Arbor - Department of Mathematics

Date Written: February 27, 2017

Abstract

In this paper we develop two numerical methods for optimal stopping in the framework of one dimensional diffusion. Both of the methods use the Skorohod embedding in order to construct recombining tree approximations for diffusions with general coefficients. This technique allows us to determine convergence rates and construct nearly optimal stopping times which are optimal at the same rate. Finally, we demonstrate the efficiency of our schemes on several models.

Keywords: American Options, Optimal Stopping, Recombining Trees, Skorokhod Embedding

Suggested Citation

Bayraktar, Erhan and Dolinsky, Yan and Guo, Jia, Recombining Tree Approximations for Optimal Stopping for Diffusions (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=2924979

Erhan Bayraktar (Contact Author)

University of Michigan at Ann Arbor - Department of Mathematics ( email )

2074 East Hall
530 Church Street
Ann Arbor, MI 48109-1043
United States

Yan Dolinsky

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Jia Guo

University of Michigan at Ann Arbor - Department of Mathematics ( email )

2074 East Hall
530 Church Street
Ann Arbor, MI 48109-1043
United States

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