American option valuation: Implied calibration of GARCH pricing models

Michael Weber and Marcel Prokopczuk ()

Journal of Futures Markets, 2011, vol. 31, issue 10, 971-994

Abstract: This study analyzes the issue of American option valuation when the underlying exhibits a GARCH‐type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation‐based methods being considered in previous studies. The EBT‐based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

Date: 2011
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Working Paper: American Option Valuation: Implied Calibration of GARCH Pricing-Models (2010)
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