𝔖 Bobbio Scriptorium
✦   LIBER   ✦

A non-lattice pricing model of American options under stochastic volatility

✍ Scribed by Zhe Zhang; Kian-Guan Lim

Publisher
John Wiley and Sons
Year
2006
Tongue
English
Weight
220 KB
Volume
26
Category
Article
ISSN
0270-7314

No coin nor oath required. For personal study only.

✦ Synopsis

In this article, an analytical approach to American option pricing under stochastic volatility is provided. Under stochastic volatility, the American option value can be computed as the sum of a corresponding European option price and an early exercise premium. By considering the analytical property of the optimal exercise boundary, the formula allows for recursive computation of the American option value. Simulation results show that a nonlattice method performs better than the lattice-based interpolation methods. The stochastic volatility model is also empirically tested using S&P 500 futures options intraday transactions data. Incorporating stochastic volatility is shown to improve pricing, hedging, and profitability in actual trading.

📜 SIMILAR VOLUMES

Pricing credit spread options under a Ma
Pricing credit spread options under a Markov chain model with stochastic default rate
✍ Jangkoo Kang; Hwa-Sung Kim 📂 Article 📅 2004 🏛 John Wiley and Sons 🌐 English ⚖ 137 KB 👁 1 views

## Abstract This paper studies a Markov chain model that, unlike the existing models, has a stochastic default rate model so as to reflect real world phenomena. We extend the existing Markov chain models as follows: First, our model includes both the economy‐wide and the rating‐specific factors, wh

A maximal affine stochastic volatility m
A maximal affine stochastic volatility model of oil prices
✍ W. Keener Hughen 📂 Article 📅 2009 🏛 John Wiley and Sons 🌐 English ⚖ 333 KB 👁 1 views

## Abstract This study develops and estimates a stochastic volatility model of commodity prices that nests many of the previous models in the literature. The model is an affine three‐factor model with one state variable driving the volatility and is maximal among all such models that are also ident

A new scheme for static hedging of Europ
A new scheme for static hedging of European derivatives under stochastic volatility models
✍ Akihiko Takahashi; Akira Yamazaki 📂 Article 📅 2009 🏛 John Wiley and Sons 🌐 English ⚖ 138 KB 👁 1 views

## Abstract This study proposes a new scheme for static hedging of European path‐independent derivatives under stochastic volatility models. First, we show that pricing European path‐independent derivatives under stochastic volatility models is transformed to pricing those under one‐factor local vo