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Pricing american options under stochastic volatility and stochastic interest rates

Contributors

Medvedev, Alexey; Scaillet, Olivier

Collection

  • Cahiers de recherche; 2007.10

Publication date

2007

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

UNIGE affiliation entities

Citation (ISO format)

MEDVEDEV, Alexey, SCAILLET, Olivier. Pricing american options under stochastic volatility and stochastic interest rates. 2007

Main files (1)

Report

Identifiers

  • PID : unige:5730
651views
1393downloads

Technical informations

Creation

15/04/2010 12:19:33

First validation

15/04/2010 12:19:33

Update

14/03/2023 15:26:21

Status update

14/03/2023 15:26:21

Last indexation

29/10/2024 14:21:33
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