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Working paper
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English

Valuing American options using fast recursive projections

Contributors

Cosma, Antonio; Galluccio, Stefano; Pederzoli, Paola; Scaillet, Olivier

Number of pages

52

Publication date

2016

Abstract

We introduce a fast and widely applicable numerical pricing method that uses recursive projections. We characterize its convergence speed. We find that the early exercise boundary of an American call option on a discrete dividend paying stock is higher under the Merton and Heston models than under the Black-Scholes model, as opposed to the continuous dividend case. A large database of call options on stocks with quarterly dividends shows that adding stochastic volatility and jumps to the Black-Scholes benchmark reduces the amount foregone by call holders failing to optimally exercise by 25%. Transaction fees cannot fully explain the suboptimal behavior.

Keywords

  • Option pricing
  • American option
  • Bermudan option
  • Discrete transform
  • Discrete dividend paying stock
  • Suboptimal non-exercise
  • Numerical techniques

Classification

  • JEL : G13

Note

New version of the 2012 text - https://archive-ouverte.unige.ch/unige:41856

UNIGE affiliation entities

Citation (ISO format)

COSMA, Antonio et al. Valuing American options using fast recursive projections. 2016

Main files (1)

Working paper

Identifiers

  • PID : unige:82087
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Technical informations

Creation

23/03/2016 09:41:00

First validation

23/03/2016 09:41:00

Update

15/03/2023 00:14:00

Status update

15/03/2023 00:14:00

Last indexation

31/10/2024 03:02:56
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