[en] 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.
Disciplines :
Finance
Author, co-author :
Cosma, Antonio ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Galluccio, Stefano; Incipit Capital, London
Pederzoli, Paola; University of Geneva and Swiss Finance Institute
Scaillet, Olivier; University of Geneva and Swiss Finance Institute
Language :
English
Title :
Valuing American options using fast recursive projections