A Non-Lattice Pricing Model of American Options under Stochastic Volatility
Publication Type
Journal Article
Publication Date
5-2006
Abstract
In this article, an analytical approach to American option pricing under stochastic volatility is provided. Under stochastic volatility, the American option value can be computed as the sum of a corresponding European option price and an early exercise premium. By considering the analytical property of the optimal exercise boundary, the formula allows for recursive computation of the American option value. Simulation results show that a nonlattice method performs better than the lattice-based interpolation methods. The stochastic volatility model is also empirically tested using S&P 500 futures options intraday transactions data. Incorporating stochastic volatility is shown to improve pricing, hedging, and profitability in actual trading. [PUBLICATION ABSTRACT]
Discipline
Finance and Financial Management
Research Areas
Finance
Publication
Journal of Futures Markets
Volume
26
Issue
5
First Page
417
Last Page
448
ISSN
0270-7314
Identifier
10.1002/fut.20207
Citation
ZHANG, Zhe and LIM, Kian Guan.
A Non-Lattice Pricing Model of American Options under Stochastic Volatility. (2006). Journal of Futures Markets. 26, (5), 417-448.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/1081
Additional URL
https://doi.org/10.1002/fut.20207