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English

Pricing american options under stochastic volatility and stochastic interest rates

Collection
  • Cahiers de recherche; 2007.10
Publication date2007
Abstract

We introduce a new analytical approach to price American options. Using an explicit and intuitively proxy for the exercise rule, we derive tractable pricing formulas using a short-maturity asymptotic expansion. Depending on model parameters, this method can accurately price options with time-to-maturity up to several years. The main advantage of our approach over existing methods lies in its straightforward extension to models with stochastic volatility and stochastic interest rates. We exploit this advantage by providing an analysis of the impact of volatility mean-reversion, volatility of volatility, and correlations on the American put price.

Keywords
  • American options
  • Stochastic volatility
  • Stochastic interest rates
  • Asymptotic approximation
Citation (ISO format)
MEDVEDEV, Alexey, SCAILLET, Olivier. Pricing american options under stochastic volatility and stochastic interest rates. 2007
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Report
accessLevelPublic
Identifiers
  • PID : unige:5730
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Technical informations

Creation04/15/2010 12:19:33 PM
First validation04/15/2010 12:19:33 PM
Update time03/14/2023 3:26:21 PM
Status update03/14/2023 3:26:21 PM
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