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unige:82087 
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Valuing American options using fast recursive projections |
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| Authors | ||
| 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 pricing — American option — Bermudan option — Discrete transform — Discrete dividend paying stock — Suboptimal non-exercise — Numerical techniques | |
| Note | New version of the 2012 text - https://archive-ouverte.unige.ch/unige:41856 | |
| Full text | ||
| Structures | ||
| Citation (ISO format) | COSMA, Antonio et al. Valuing American options using fast recursive projections. 2016 https://archive-ouverte.unige.ch/unige:82087 |
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