Valuing American options using fast recursive projections

Antonio Cosma (), Stefano Galluccio, Paola Pederzoli and Olivier Scaillet

No unige:82087, Working Papers from University of Geneva, Geneva School of Economics and Management

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.

Keywords: Option pricing; American option; Bermudan option; Discrete transform; Discrete dividend paying stock; Suboptimal non-exercise; Numerical techniques (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Pages: 52 p.
Date: 2016
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Related works:
Working Paper: Valuing American options using fast recursive projections (2015)
Working Paper: Valuing American Options Using Fast Recursive Projections (2012)
Working Paper: Valuing American options using fast recursive projections (2012)
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