Title

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