Pricing American Options under Stochastic Volatility and Stochastic Interest Rates

Alexey Medvedev and Olivier Scaillet
Additional contact information
Alexey Medvedev: Banquier Privé Lombard Odier and Swiss Finance Institute
Olivier Scaillet: University of Geneva, HEC and Swiss Finance Institute
Authors registered in the RePEc Author Service: Oliver Bruce Linton

No 07-25, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce a new analytical approach to price American options. Using an explicit and intuitive proxy for the exercise rule, we derive tractable pricing formulas using a short-maturity asymptotic expansion. Depending on model parameters, this method can accurately price options with time-to-maturity up to several years. The main advantage of our approach over existing methods lies in its straightforward extension to models with stochastic volatility and stochastic interest rates. We exploit this advantage by providing an analysis of the impact of volatility mean-reversion, volatility of volatility, and correlations on the American put price.

Keywords: American options; stochastic volatility; stochastic interest rates; asymptotic approximation. (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-04
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=966055 (application/pdf)

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:chf:rpseri:rp0725

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().