A simpler algorithm to price American Lookback options in a discrete stochastic volatility model

Ramprasath L ()
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Ramprasath L: Indian Institute of Management Kozhikode

No 294, Working papers from Indian Institute of Management Kozhikode

Abstract: This article develops an efficient pricing algorithm for American lookback options on a binomial lattice with stochastic volatility. This is achieved by combining the structure of this lattice together with the fact that one can price lookbacks on a standard binomial lattice without having to store the path variables. We apply this algorithm to study the efficiency of fractional lookback contracts, which are used as a benchmark for designing equity indexed annuities, and illustrate the impact of volatility persistence on their prices. This algorithm also extends the usefulness of the stochastic volatility model proposed by Aingworth, Das and Motwani (2006) by enabling the pricing of lookback options on their lattice.

Keywords: American Lookback Options; Stochastic Volatility; Binomial lattice; Markov switching; Volatility persistence (search for similar items in EconPapers)
Pages: 18 pages
Date: 2018-10
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