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American Option Valuation: Implied Calibration of GARCH Pricing-Models

Author

Listed:
  • Michael Weber

    (Haas School of Business, University of California at Berkeley)

  • Marcel Prokopczuk

    (ICMA Centre, University of Reading)

Abstract

This article analyzes the issue of American option valuation when the underlying exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation-based methods being considered in previous studies. The EBT-based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach.

Suggested Citation

  • Michael Weber & Marcel Prokopczuk, 2010. "American Option Valuation: Implied Calibration of GARCH Pricing-Models," ICMA Centre Discussion Papers in Finance icma-dp2010-02, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2010-02
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    File URL: http://www.icmacentre.ac.uk/files/dp201002.pdf
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    Cited by:

    1. Lin, Shin-Hung & Huang, Hung-Hsi & Li, Sheng-Han, 2015. "Option pricing under truncated Gram–Charlier expansion," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 77-97.
    2. Liu, Yanxin & Li, Johnny Siu-Hang & Ng, Andrew Cheuk-Yin, 2015. "Option pricing under GARCH models with Hansen's skewed-t distributed innovations," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 108-125.
    3. Juan M. Gómez & Yeny E. Rodríguez, 2022. "Multiperiod Portfolio of Energy Purchasing Strategies including Climate Scenarios," Energies, MDPI, vol. 15(9), pages 1-25, April.
    4. Lars Stentoft, 2013. "American option pricing using simulation with an application to the GARCH model," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 5, pages 114-147, Edward Elgar Publishing.

    More about this item

    Keywords

    American Options; GARCH; Implied Calibration; Edgeworth Binomial Tree;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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