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arXiv · 2601.18634

The Compound BSDE Method: A Fully Forward Method for Option Pricing and Optimal Stopping Problems in Finance

Zhipeng Huang·Cornelis W. Oosterlee
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Abstract

We propose the Compound BSDE method, a fully forward, deep-learning-based approach for solving a broad class of problems in financial mathematics, including optimal stopping. The method is based on a reformulation of option pricing problems in terms of a system of backward stochastic differential equations (BSDEs), which offers a new perspective on the numerical treatment of compound options and optimal stopping problems such as Bermudan option pricing. Building on the classical deep BSDE method for a single BSDE, we develop an algorithm for compound BSDEs and establish its convergence properties. In particular, we derive an a posteriori error estimate for the proposed method. Numerical experiments demonstrate the accuracy and computational efficiency of the approach, and illustrate its effectiveness for high-dimensional option pricing and optimal stopping problems.

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Zhipeng Huang, Cornelis W. Oosterlee. 2026-01-26. The Compound BSDE Method: A Fully Forward Method for Option Pricing and Optimal Stopping Problems in Finance. https://arxiv.org/abs/2601.18634

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