 American option pricing under the double Heston model based on asymptotic expansionS. M. Zhang and Y. Feng Quantitative Finance, 2019, vol. 19, issue 2, 211-226 Abstract: This paper focuses on pricing American put options under the double Heston model proposed by Christoffersen et al. By introducing an explicit exercise rule, we obtain the asymptotic expansion of the solution to the partial differential equation for pricing American put options. We calculate American option price by the sum of the European option price and the early exercise premium. The early exercise premium is calculated by the difference between the American and European option prices based on asymptotic expansions. The European option price is obtained by the efficient COS method. Based on the obtained American option price, the double Heston model is calibrated by minimizing the distance between model and market prices, which yields an optimization problem that is solved by a differential evolution algorithm combined with the Matlab function fmincon.m. Numerical results show that the pricing approach is fast and accurate. Empirical results show that the double Heston model has better performance in pricing short-maturity American put options and capturing the volatility term structure of American put options than the Heston model. Date: 2019 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:19:y:2019:i:2:p:211-226 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2018.1478119 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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