Valuing American Options Using Fast Recursive Projections
Antonio Cosma (),
Stefano Galluccio,
Paola Pederzoli and
Olivier Scaillet
Additional contact information
Stefano Galluccio: BNP Paribas Fixed Income
Paola Pederzoli: University of Geneva
No 12-26, Swiss Finance Institute Research Paper Series from Swiss Finance Institute
Abstract:
We introduce a fast and widely applicable numerical pricing method that uses recursive projections. We characterize its convergence speed. We find that the early exercise boundary of an American call option on a discrete dividend paying stock is higher under the Merton and Heston models than under the Black-Scholes model, as opposed to the continuous dividend case. A large database of call options on stocks with quarterly dividends shows that adding stochastic volatility and jumps to the Black-Scholes benchmark reduces the amount foregone by call holders failing to optimally exercise by 25\%. Transaction fees cannot fully explain the suboptimal behavior.
Pages: 69 pages
Date: 2012-06
New Economics Papers: this item is included in nep-cmp
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http://ssrn.com/abstract=2091236 (application/pdf)
Related works:
Working Paper: Valuing American options using fast recursive projections (2016) 
Working Paper: Valuing American options using fast recursive projections (2015) 
Working Paper: Valuing American options using fast recursive projections (2012) 
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1226
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