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Approximating American option prices in the GARCH framework
Author(s) -
Duan JinChuan,
Gauthier Geneviève,
Sasseville Caroline,
Simonato JeanGuy
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10096
Subject(s) - autoregressive conditional heteroskedasticity , univariate , bivariate analysis , econometrics , binomial options pricing model , valuation (finance) , context (archaeology) , economics , mathematics , valuation of options , multivariate statistics , statistics , volatility (finance) , finance , geography , archaeology
This article proposes an efficient approach for computing the prices of American style options in the GARCHframework. Rubinstein's (1998) Edgeworth tree idea is combined with the analytical formulas formoments of the cumulative return under GARCH developed in Duan et al. (1999, 2002) to yield a simplerecombining binomial tree for option valuation in the GARCH context. Because the resulting tree is univariate, theproposed approach represents a convenient approximation of the bivariate GARCH system. Numerical analysis is usedto demonstrate the speed and accuracy of the proposed approximation. © 2003 Wiley Periodicals, Inc. Jrl FutMark 23:915–929, 2003