Seize the Moments: Approximating American Option Prices in the GARCH Framework
AbstractThis paper proposes an efficient approach to compute the prices of American style options in the GARCH framework. Rubinstein's (1998) Edgeworth tree idea is combined with the analytical formulas for moments of the cumulative return under GARCH developed in Duan et al. (1999, 2002) to yield a simple recombining binomial tree for option valuation in the GARCH context. Since the resulting tree is univariate, the proposed approach represents a convenient approximation of the bivariate GARCH system. Numerical analyses are used to demonstrate the speed and accuracy of the proposed approximation.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0206005.
Length: 15 pages
Date of creation: 30 Jun 2002
Date of revision:
Note: Type of Document - PDF; pages: 15
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American Options; Edgeworth binomial tree; Garch process;
Find related papers by JEL classification:
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-07-31 (All new papers)
- NEP-ETS-2002-07-31 (Econometric Time Series)
- NEP-FIN-2002-07-31 (Finance)
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