American Option Valuation: Implied Calibration of GARCH Pricing-Models

Michael Weber and Marcel Prokopczuk ()
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Michael Weber: Haas School of Business, University of California at Berkeley

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: This article analyzes the issue of American option valuation when the underlying exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation-based methods being considered in previous studies. The EBT-based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach.

Keywords: American Options; GARCH; Implied Calibration; Edgeworth Binomial Tree (search for similar items in EconPapers)
JEL-codes: C22 C51 G13 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-01
New Economics Papers: this item is included in nep-cfn
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Journal Article: American option valuation: Implied calibration of GARCH pricing models (2011)
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