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Valuing American options using fast recursive projections

Number of pages52
Publication date2016
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
NoteNew version of the 2012 text - https://archive-ouverte.unige.ch/unige:41856
Citation (ISO format)
COSMA, Antonio et al. Valuing American options using fast recursive projections. 2016
Main files (1)
Working paper
accessLevelPublic
Identifiers
  • PID : unige:82087
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Technical informations

Creation03/23/2016 9:41:00 AM
First validation03/23/2016 9:41:00 AM
Update time03/15/2023 12:14:00 AM
Status update03/15/2023 12:14:00 AM
Last indexation01/16/2024 8:29:54 PM
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