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
References: Add references at CitEc
Citations:

Downloads: (external link)
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)
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:rp1226

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 ().