IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1305.0479.html
   My bibliography  Save this paper

A robust tree method for pricing American options with CIR stochastic interest rate

Author

Listed:
  • Elisa Appolloni
  • Lucia Caramellino
  • Antonino Zanette

Abstract

We propose a robust and stable lattice method which permits to obtain very accurate American option prices in presence of CIR stochastic interest rate without any numerical restriction on its parameters. Numerical results show the reliability and the accuracy of the proposed method.

Suggested Citation

  • Elisa Appolloni & Lucia Caramellino & Antonino Zanette, 2013. "A robust tree method for pricing American options with CIR stochastic interest rate," Papers 1305.0479, arXiv.org.
  • Handle: RePEc:arx:papers:1305.0479
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1305.0479
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kaushik Amin & Ajay Khanna, 1994. "Convergence Of American Option Values From Discrete‐ To Continuous‐Time Financial Models1," Mathematical Finance, Wiley Blackwell, vol. 4(4), pages 289-304, October.
    2. Brennan, Michael J. & Schwartz, Eduardo S., 1976. "The pricing of equity-linked life insurance policies with an asset value guarantee," Journal of Financial Economics, Elsevier, vol. 3(3), pages 195-213, June.
    3. Jimmy E. Hilliard & Adam L. Schwartz & Alan L. Tucker, 1996. "Bivariate Binomial Options Pricing With Generalized Interest Rate Processes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(4), pages 585-602, December.
    4. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Melnikov, Alexander & Romaniuk, Yulia, 2006. "Evaluating the performance of Gompertz, Makeham and Lee-Carter mortality models for risk management with unit-linked contracts," Insurance: Mathematics and Economics, Elsevier, vol. 39(3), pages 310-329, December.
    2. Cocozza, Rosa & De Simone, Antonio, 2011. "One numerical procedure for two risk factors modeling," MPRA Paper 30859, University Library of Munich, Germany.
    3. Das, Sanjiv Ranjan, 1998. "A direct discrete-time approach to Poisson-Gaussian bond option pricing in the Heath-Jarrow-Morton model," Journal of Economic Dynamics and Control, Elsevier, vol. 23(3), pages 333-369, November.
    4. Chuang-Chang Chang & Jun-Biao Lin & Wei-Che Tsai & Yaw-Huei Wang, 2012. "Using Richardson extrapolation techniques to price American options with alternative stochastic processes," Review of Quantitative Finance and Accounting, Springer, vol. 39(3), pages 383-406, October.
    5. Guillen, Montserrat & Jorgensen, Peter Lochte & Nielsen, Jens Perch, 2006. "Return smoothing mechanisms in life and pension insurance: Path-dependent contingent claims," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 229-252, April.
    6. Viral V. Acharya & Jennifer N. Carpenter, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1355-1383.
    7. Lee, Huai-I & Hsieh, Tsung-Yu & Kuo, Wen-Hsiu & Hsu, Hsinan, 2015. "Can a path-dependent strategy outperform a path-independent strategy?," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 119-127.
    8. Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph, 2015. "Optimal life cycle portfolio choice with variable annuities offering liquidity and investment downside protection," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 91-107.
    9. Buttimer, Richard Jr. & Lin, Che-Chun, 2005. "Valuing US and Canadian mortgage servicing rights with default and prepayment," Journal of Housing Economics, Elsevier, vol. 14(3), pages 194-211, September.
    10. Melnikov, Alexander & Tong, Shuo, 2014. "Valuation of finance/insurance contracts: Efficient hedging and stochastic interest rates modeling," Risk and Decision Analysis, IOS Press, issue 5, pages 23-41.
    11. Costabile, Massimo & Gaudenzi, Marcellino & Massabò, Ivar & Zanette, Antonino, 2009. "Evaluating fair premiums of equity-linked policies with surrender option in a bivariate model," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 286-295, October.
    12. Maya Briani & Lucia Caramellino & Antonino Zanette, 2013. "A hybrid approach for the implementation of the Heston model," Papers 1307.7178, arXiv.org, revised Sep 2017.
    13. Wang, Nan & Gerrard, Russell & Haberman, Steven, 2004. "The premium and the risk of a life policy in the presence of interest rate fluctuations," Insurance: Mathematics and Economics, Elsevier, vol. 35(3), pages 537-551, December.
    14. Gao, Quansheng & He, Ting & Zhang, Chi, 2011. "Quantile hedging for equity-linked life insurance contracts in a stochastic interest rate economy," Economic Modelling, Elsevier, vol. 28(1-2), pages 147-156, January.
    15. Chuang-Chang Chang & Jun-Biao Lin & Chun-Chieh Yang, 2015. "The effect of stochastic interest rates on a firm’s capital structure under a generalized model," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 695-719, November.
    16. Leunglung Chan & Eckhard Platen, 2016. "Pricing of long dated equity-linked life insurance contracts," Published Paper Series 2016-5, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    17. Bacinello, Anna Rita & Ortu, Fulvio, 1996. "Fixed income linked life insurance policies with minimum guarantees: Pricing models and numerical results," European Journal of Operational Research, Elsevier, vol. 91(2), pages 235-249, June.
    18. Gao, Quansheng & He, Ting & Zhang, Chi, 2011. "Quantile hedging for equity-linked life insurance contracts in a stochastic interest rate economy," Economic Modelling, Elsevier, vol. 28(1), pages 147-156.
    19. Camilla LandÊn, 2000. "Bond pricing in a hidden Markov model of the short rate," Finance and Stochastics, Springer, vol. 4(4), pages 371-389.
    20. Álvarez Echeverría Francisco & López Sarabia Pablo & Venegas Martínez Francisco, 2012. "Valuación financiera de proyectos de inversión en nuevas tecnologías con opciones reales," Contaduría y Administración, Accounting and Management, vol. 57(3), pages 115-145, julio-sep.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1305.0479. 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: (arXiv administrators). General contact details of provider: http://arxiv.org/ .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.