Linear-time accurate lattice algorithms for tail conditional expectation

Abstract

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.