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

Author

Listed:
  • Elisa Appolloni

    (UNIROMA - Università degli Studi di Roma "La Sapienza" = Sapienza University [Rome])

  • Lucia Caramellino

    (Università degli Studi di Roma Tor Vergata [Roma] = University of Rome Tor Vergata)

  • Antonino Zanette

    (MATHRISK - Mathematical Risk handling - Inria Paris-Rocquencourt - Inria - Institut National de Recherche en Informatique et en Automatique - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École des Ponts ParisTech)

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, 2015. "A robust tree method for pricing American options with CIR stochastic interest rate," Post-Print hal-00916441, HAL.
    • Handle: RePEc:hal:journl:hal-00916441
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    Cited by:

    1. Maya Briani & Lucia Caramellino & Giulia Terenzi & Antonino Zanette, 2019. "Numerical Stability Of A Hybrid Method For Pricing Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(07), pages 1-46, November.
    2. Cheng Cai & Tiziano De Angelis & Jan Palczewski, 2022. "The American put with finite‐time maturity and stochastic interest rate," Mathematical Finance, Wiley Blackwell, vol. 32(4), pages 1170-1213, October.
    3. Maya Briani & Lucia Caramellino & Giulia Terenzi & Antonino Zanette, 2016. "Numerical stability of a hybrid method for pricing options," Papers 1603.07225, arXiv.org, revised Dec 2019.

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