What is it about?
We develop a solution method for American put options that directly employs the policy iteration principle of dynamic programming. The method iteratively improves exercise policies, obtains monotonically increasing value functions and converges quadratically under reasonable assumptions. We present a numerical implementation that exhibits these features. The same principle is also applied to obtain a monotonically improving policy iteration scheme for general free boundary optimal control problems.
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Why is it important?
Presents a widely applicable method for optimal stopping problems.
Perspectives
The method is successful in the well known American put problem, but its potential is in higher-dimensional problems.
EVANGELOS MAGEIROU
Athens University of Economics and Business
Read the Original
This page is a summary of: A policy iteration algorithm for the American put option and free boundary control problems, Journal of Computational and Applied Mathematics, October 2019, Elsevier,
DOI: 10.1016/j.cam.2019.112544.
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