A Stochastic Dynamic Program for Valuing Options on Futures

Mohamed A. Ayadi, Hatem Ben‐Ameur, Tymur Kirillov and Robert Welch

Journal of Futures Markets, 2014, vol. 34, issue 12, 1185-1201

Abstract: We propose a stochastic dynamic program (SDP) for valuing options on stock‐index futures. SDP accommodates European‐ as well as American‐style options, and price limits on the underlying futures contracts. Our numerical investigation shows convergence, robustness, and efficiency. SDP presents some advantages and disadvantages with respect to the binomial tree and finite differences, and stands as a viable alternative to these classic numerical methodologies for option valuation. Our empirical investigation, which focuses on American options on the S&P 500 futures contract, is almost perfect for implicit volatilities, but somewhat mitigated for historical volatilities. In volatile markets, we recommend short time windows for the volatility estimation step. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:1185–1201, 2014

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:34:y:2014:i:12:p:1185-1201

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().