Seize the Moments: Approximating American Option Prices in the GARCH Framework

Jin-Chuan Duan, Genevieve Gauthier, Caroline Sasseville and Jean-Guy Simonato ()
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Jin-Chuan Duan: University of Toronto
Genevieve Gauthier: HEC Montreal
Caroline Sasseville: HEC Montreal

Finance from EconWPA

Abstract: This paper proposes an efficient approach to compute 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. Since the resulting tree is univariate, the proposed approach represents a convenient approximation of the bivariate GARCH system. Numerical analyses are used to demonstrate the speed and accuracy of the proposed approximation.

Keywords: American Options; Edgeworth binomial tree; Garch process (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-fin
Date: 2002-06-30
Note: Type of Document - PDF; pages: 15
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0206005

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