A Fast Fourier Transform Technique for Pricing American Options Under Stochastic Volatility
Oleksandr Zhylyevskyy ()
Staff General Research Papers Archive from Iowa State University, Department of Economics
This paper develops a non-finite-difference-based method of American option pricing under stochastic volatility by extending the Geske-Johnson compound option scheme. The characteristic function of the underlying state vector is inverted to obtain the vector's density using a kernel-smoothed fast Fourier transform technique. The method produces option values that are closely in line with the values obtained by finite-difference schemes. It also performs well in an empirical application with traded S&P 100 index options. The method is especially well suited to price a set of options with different strikes on the same underlying asset, which is a task often encountered by practitioners.
Keywords: stochastic volatility; heston model; Geske-Johnson scheme; fast fourier transform; characteristic function inversion (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
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Published in Review of Derivatives Research, March 2010, vol. 13 no. 1, pp. 1-24
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Journal Article: A fast Fourier transform technique for pricing American options under stochastic volatility (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:13112
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