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We introduce a new analytical approach to price American options. Using an explicit and intuitive proxy for the exercise rule, we derive tractable pricing formulas using a short-maturity asymptotic expansion. Depending on model parameters, this method can accurately price options with time-to-maturity up to several years. The main advantage of our approach over existing methods lies in its straightforward extension to models with stochastic volatility and stochastic interest rates. We exploit this advantage by providing an analysis of the impact of volatility mean-reversion, volatility of volatility, and correlations on the American put price

Author

Listed:
  • Alexey MEDVEDEV

    (Banquier Privé Lombard Odier and Swiss Finance Institute)

  • Olivier SCAILLET

    (University of Geneva, HEC and Swiss Finance Institute)

Abstract

No abstract is available for this item.

Suggested Citation

  • Alexey MEDVEDEV & Olivier SCAILLET, "undated". "We introduce a new analytical approach to price American options. Using an explicit and intuitive proxy for the exercise rule, we derive tractable pricing formulas using a short-maturity asymptotic ex," Swiss Finance Institute Research Paper Series 07-25, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0725
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    References listed on IDEAS

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    1. Olivier Scaillet, 2005. "A Kolmogorov-Smirnov Type Test for Positive Quadrant Dependence," FAME Research Paper Series rp128, International Center for Financial Asset Management and Engineering.
    2. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, August.
    3. Joe, Harry, 2005. "Asymptotic efficiency of the two-stage estimation method for copula-based models," Journal of Multivariate Analysis, Elsevier, vol. 94(2), pages 401-419, June.
    4. Christian Genest & Jean-François Quessy & Bruno Rémillard, 2006. "Goodness-of-fit Procedures for Copula Models Based on the Probability Integral Transformation," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 33(2), pages 337-366.
    5. Jean-David FERMANIAN & Olivier SCAILLET, 2003. "Nonparametric Estimation of Copulas for Time Series," FAME Research Paper Series rp57, International Center for Financial Asset Management and Engineering.
    6. Deheuvels, Paul, 1981. "An asymptotic decomposition for multivariate distribution-free tests of independence," Journal of Multivariate Analysis, Elsevier, vol. 11(1), pages 102-113, March.
    7. Rémillard, Bruno & Scaillet, Olivier, 2009. "Testing for equality between two copulas," Journal of Multivariate Analysis, Elsevier, vol. 100(3), pages 377-386, March.
    8. Fermanian, Jean-David, 2005. "Goodness-of-fit tests for copulas," Journal of Multivariate Analysis, Elsevier, vol. 95(1), pages 119-152, July.
    9. Scaillet, Olivier, 2007. "Kernel-based goodness-of-fit tests for copulas with fixed smoothing parameters," Journal of Multivariate Analysis, Elsevier, vol. 98(3), pages 533-543, March.
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    More about this item

    Keywords

    American options; stochastic volatility; stochastic interest rates; asymptotic approximation.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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