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Pricing Options under Generalized GARCH and Stochastic Volatility Processes

  • Peter Ritchken

    (Weatherhead School of Management, Case Western Reserve University, Cleveland,)

  • Rob Trevor

    (Centre for Studies in Money, Banking and Finance, Macquarie University, Sydney, Australia)

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    In this paper, we develop an efficient lattice algorithm to price European and American options under discrete time GARCH processes. We show that this algorithm is easily extended to price options under generalized GARCH processes, with many of the existing stochastic volatility bivariate diffusion models appearing as limiting cases. We establish one unifying algorithm that can price options under almost all existing GARCH specifications as well as under a large family of bivariate diffusions in which volatility follows its own, perhaps correlated, process. Copyright The American Finance Association 1999.

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    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 54 (1999)
    Issue (Month): 1 (02)
    Pages: 377-402

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    Handle: RePEc:bla:jfinan:v:54:y:1999:i:1:p:377-402
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