A robust tree method for pricing American options with CIR stochastic interest rate

Elisa Appolloni, Lucia Caramellino and Antonino Zanette
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Elisa Appolloni: UNIROMA - Università degli Studi di Roma "La Sapienza" = Sapienza University [Rome]
Lucia Caramellino: Università degli Studi di Roma Tor Vergata [Roma, Italia] = University of Rome Tor Vergata [Rome, Italy] = Université de Rome Tor Vergata [Rome, Italie]
Antonino Zanette: MATHRISK - Mathematical Risk handling - Inria Paris-Rocquencourt - Inria - Institut National de Recherche en Informatique et en Automatique - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École nationale des ponts et chaussées

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Abstract: We propose a robust and stable lattice method which permits to obtain very accurate American option prices in presence of CIR stochastic interest rate without any numerical restriction on its parameters. Numerical results show the reliability and the accuracy of the proposed method.

Date: 2015
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Published in IMA Journal of Management Mathematics, 2015, 26 (4), pp.377-401

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00916441

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