Eprint first made available on ORBilu (E-prints, Working papers and Research blog)
Valuing American options using fast recursive projections
Cosma, Antonio; Galluccio, Stefano; Pederzoli, Paola et al.
2015
 

Files


Full Text
FRPpaper2015.pdf
Author preprint (934.66 kB)
Request a copy

All documents in ORBilu are protected by a user license.

Send to



Details



Keywords :
Option pricing; American option; Bermudan option; discrete transform; discrete dividend paying stock; suboptimal non-exercise; numerical techniques
Abstract :
[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
Publication date :
December 2015
Focus Area :
Finance
Available on ORBilu :
since 08 March 2016

Statistics


Number of views
88 (11 by Unilu)
Number of downloads
0 (0 by Unilu)

Bibliography


Similar publications



Contact ORBilu