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Approximating American option prices in the GARCH framework

✍ Scribed by Jin-Chuan Duan; Geneviève Gauthier; Caroline Sasseville; Jean-Guy Simonato

Publisher
John Wiley and Sons
Year
2003
Tongue
English
Weight
164 KB
Volume
23
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This article proposes an efficient approach for computing the prices of American style options in the GARCH
framework. Rubinstein's (1998) Edgeworth tree idea is combined with the analytical formulas for
moments of the cumulative return under GARCH developed in Duan et al. (1999, 2002) to yield a simple
recombining binomial tree for option valuation in the GARCH context. Because the resulting tree is univariate, the
proposed approach represents a convenient approximation of the bivariate GARCH system. Numerical analysis is used
to demonstrate the speed and accuracy of the proposed approximation. © 2003 Wiley Periodicals, Inc. Jrl Fut
Mark 23:915–929, 2003

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