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American option valuation: Implied calibration of GARCH pricing models

✍ Scribed by Michael Weber; Marcel Prokopczuk

Publisher: John Wiley and Sons
Year: 2010
Tongue: English
Weight: 151 KB
Volume: 31
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20496

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✦ Synopsis

This study analyzes the issue of American option valuation when the underlying exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation-based methods being considered in previous studies. The EBT-based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach.

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