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.
Copyright Owner
Springer
Copyright Date
2010
Language
en
File Format
application/pdf
Recommended Citation
Zhylyevskyy, Oleksandr, "A fast Fourier transform technique for pricing American options under stochastic volatility" (2010). Economics Publications. 44.
https://lib.dr.iastate.edu/econ_las_pubs/44
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.