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American option valuation: Implied calibration of GARCH pricing models
Author(s) -
Weber Michael,
Prokopczuk Marcel
Publication year - 2011
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.20496
Subject(s) - valuation of options , valuation (finance) , binomial options pricing model , economics , autoregressive conditional heteroskedasticity , equity (law) , econometrics , trinomial tree , implied volatility , volatility (finance) , sabr volatility model , financial economics , actuarial science , finance , political science , law
Abstract This study 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. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark