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Pricing American options under stochastic volatility and stochastic interest rates

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Published in Journal of Financial Economics. 2010, vol. 98, no. 1, p. 145-159
Abstract We introduce a new analytical approach to price American options. Using an explicit and intuitive 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 optionsStochastic volatilityStochastic interest ratesAsymptotic approximation
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Research group Geneva Finance Research Institute (GFRI)
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MEDVEDEV, Alexey, SCAILLET, Olivier. Pricing American options under stochastic volatility and stochastic interest rates. In: Journal of Financial Economics, 2010, vol. 98, n° 1, p. 145-159. https://archive-ouverte.unige.ch/unige:79887

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Deposited on : 2016-01-22

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