An Inverse Problem in American Options as a Mathematical Program with Equilibrium Constraints: C-Stationarity and an Active-Set-Newton Solver
Michael Hintermüller, Moulay Hicham Tber · SIAM Journal on Control and Optimization · 2010
An inverse problem in the pricing of American options is considered. The problem is formulated as an output least-squares problem governed by a parabolic variational inequality in non-divergence form. The existence of an optimal solution is proved, and first-order optimality conditions of C-stationarity-type are derived by using a relaxation-penalization technique. Numerically, the discrete optimality system is solved by an active-set-Newton solver with feasibility restoration.