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American-style options in jump-diffusion models: estimation and evaluation

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  • Hatem Ben-Ameur
  • Rim Chérif
  • Bruno Rémillard

Abstract

We propose dynamic programming coupled with finite elements for valuing American-style options under Gaussian and double exponential jumps à la Merton [ J. Financ. Econ. , 1976, 3 , 125--144] and Kou [ Manage. Sci. , 2002, 48 , 1086--1101], and we provide a proof of uniform convergence. Our numerical experiments confirm this convergence result and show the efficiency of the proposed methodology. We also address the estimation problem and report an empirical investigation based on Home Depot. Jump-diffusion models outperform their pure-diffusion counterparts.

Suggested Citation

  • Hatem Ben-Ameur & Rim Chérif & Bruno Rémillard, 2016. "American-style options in jump-diffusion models: estimation and evaluation," Quantitative Finance, Taylor & Francis Journals, vol. 16(8), pages 1313-1324, August.
    • Handle: RePEc:taf:quantf:v:16:y:2016:i:8:p:1313-1324
    DOI: 10.1080/14697688.2016.1142670
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    Cited by:

    1. Hatem Ben-Ameur & Tarek Fakhfakh & Alexandre Roch, 2024. "Valuing Corporate Securities When the Firm’s Assets are Illiquid," Computational Economics, Springer;Society for Computational Economics, vol. 63(2), pages 579-598, February.

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