Analytical Approximations for the Critical Stock Prices of American Options: A Performance Comparison
Minqiang Li
MPRA Paper from University Library of Munich, Germany
Abstract:
Many e±cient and accurate analytical methods for pricing American options now exist. However, while they can produce accurate option prices, they often do not give accurate critical stock prices. In this paper, we propose two new analytical approximations for American options based on the quadratic approximation. We compare our methods with existing analytical methods including the quadratic approximations in Barone-Adesi and Whaley (1987) and Barone-Adesi and Elliott (1991), the lower bound approximation in Broadie and Detemple (1996), the tangent approximation in Bunch and Johnson (2000), the Laplace inversion method in Zhu (2006b), and the interpolation method in Li (2008). Both of our methods give much more accurate critical stock prices than all the existing methods above.
Keywords: American option; Analytical approximation; Critical stock price (search for similar items in EconPapers)
JEL-codes: C02 C63 G13 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)
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Journal Article: Analytical approximations for the critical stock prices of American options: a performance comparison (2010) 
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15018
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