Advanced Search
MyIDEAS: Login

Pricing American Options under Stochastic Volatility

Contents:

Author Info

  • Andrew Ziogas
  • Carl Chiarella

Abstract

This paper provides an extension of McKean’s (1965) incomplete Fourier transform method to solve the two-factor partial differential equation for the price and early exercise surface of an American call option, in the case where the volatility of the underlying evolves randomly. The Heston (1993) square-root process is used for the volatility dynamics. The price is given by an integral equation dependent upon the early exercise surface, using a free boundary approximation that is linear in volatility. By evaluating the pricing equation along the free surface boundary, we provide a corresponding integral equation for the early exercise region. An algorithm is proposed for solving the integral equation system, based upon numerical integration techniques for Volterra integral equations. The method is implemented, and the resulting prices are compared with the constant volatility model. The computational efficiency of the numerical integration scheme is also considered

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 77.

as in new window
Length:
Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:77

Contact details of provider:
Email:
Web page: http://comp-econ.org/
More information through EDIRC

Related research

Keywords: American options; stochastic volatility; Volterra integral equations; free boundary problem;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Susanne Griebsch & Kay Pilz, 2012. "A Stochastic Approach to the Valuation of Barrier Options in Heston's Stochastic Volatility Model," Research Paper Series 309, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Gerald Cheang & Carl Chiarella & Andrew Ziogas, 2009. "An Analysis of American Options under Heston Stochastic Volatility and Jump-Diffusion Dynamics," Research Paper Series 256, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Carl Chiarella & Jonathan Ziveyi, 2011. "Two Stochastic Volatility Processes - American Option Pricing," Research Paper Series 292, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Farid AitSahlia & Manisha Goswami & Suchandan Guha, 2010. "American option pricing under stochastic volatility: an efficient numerical approach," Computational Management Science, Springer, vol. 7(2), pages 171-187, April.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:77. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.