Analytical approximations for the critical stock prices of American options: a performance comparison
AbstractMany eÂ±cient and accurate analytical methods for pricing American options now exist. However, while they can produce accurate option prices, they often do not give accurate critical stock prices. In this paper, we propose two new analytical approximations for American options based on the quadratic approximation. We compare our methods with existing analytical methods including the quadratic approximations in Barone-Adesi and Whaley (1987) and Barone-Adesi and Elliott (1991), the lower bound approximation in Broadie and Detemple (1996), the tangent approximation in Bunch and Johnson (2000), the Laplace inversion method in Zhu (2006b), and the interpolation method in Li (2008). Both of our methods give much more accurate critical stock prices than all the existing methods above.
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Bibliographic InfoArticle provided by Springer in its journal Review of Derivatives Research.
Volume (Year): 13 (2010)
Issue (Month): 1 (April)
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Web page: http://www.springerlink.com/link.asp?id=102989
American option; Analytical approximation; Critical stock price; C02; C63; G13;
Other versions of this item:
- Minqiang Li, Li, 2009. "Analytical Approximations for the Critical Stock Prices of American Options: A Performance Comparison," MPRA Paper 15018, University Library of Munich, Germany.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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"A Quasi-analytical Interpolation Method for Pricing American Options under General Multi-dimensional Diffusion Processes,"
17348, University Library of Munich, Germany.
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