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Title

Valuing American options using fast recursive projections

Authors
Cosma, Antonio
Galluccio, Stefano
Year 2016
Description 52 p.
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 pricingAmerican optionBermudan optionDiscrete transformDiscrete dividend paying stockSuboptimal non-exerciseNumerical techniques
Note New version of the 2012 text - https://archive-ouverte.unige.ch/unige:41856
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COSMA, Antonio et al. Valuing American options using fast recursive projections. 2016 https://archive-ouverte.unige.ch/unige:82087

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Deposited on : 2016-03-23

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