Pricing American Options with Stochastic Volatility: Evidence from S&P 500 Futures Options
Publication Type
Journal Article
Publication Date
2000
Abstract
This article tests empirically a numerical solution to price American options under stochastic volatility. The model allows for a mean-reverting stochastic-volatility process with non-zero risk premium for the volatility risk and correlation with the underlying process. A general solution of risk-neutral probabilities and price movements is derived. The empirical test shows clear evidence supporting the occurrence of stochastic volatility. The stochastic-volatility model outperforms the constant-volatility model by producing smaller bias and better goodness of fit in both the in-sample and out-of-sample test
Discipline
Business
Research Areas
Finance
Publication
Journal of Futures Markets
Volume
20
Issue
7
First Page
625
Last Page
659
ISSN
0270-7314
Identifier
10.1002/1096-9934(200008)20:7<625::AID-FUT2>3.0.CO;2-M
Citation
Lim, Kian Guan and Guo, X. Q..
Pricing American Options with Stochastic Volatility: Evidence from S&P 500 Futures Options. (2000). Journal of Futures Markets. 20, (7), 625-659.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/2131