Campus Units

Economics

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

2010

Journal or Book Title

Review of Derivatives Research

Volume

13

Issue

1

First Page or Article ID Number

1

Last Page

24

DOI

10.1007/s11147-009-9041-6

Abstract

This paper develops a non-finite-difference-based method of American option pricing under stochastic volatility by extending the Geske-Johnson compound option scheme. The characteristic function of the underlying state vector is inverted to obtain the vector’s density using a kernel-smoothed fast Fourier transform technique. The method produces option values that are closely in line with the values obtained by finite-difference schemes. It also performs well in an empirical application with traded S&P 100 index options. The method is especially well suited to price a set of options with different strikes on the same underlying asset, which is a task often encountered by practitioners.

Comments

This is a manuscript of an article from Review of Derivatives Research 13 (2010): 1, doi:10.1007/s11147-009-9041-6. Posted with permission. The final publication is available at Springer via http://dx.doi.org/10.1007/s11147-009-9041-6.

Copyright Owner

Springer

Language

en

File Format

application/pdf

Published Version

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