American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods
Mark Broadie,Jerome Detemple +1 more
TLDR
A modification of the binomial method (termed BBSR) is introduced that is very simple to implement and performs remarkable well and a careful large-scale evaluation of many recent methods for computing American option prices is conducted.Abstract:
We develop lower and upper bounds on the prices of American call and put options written on a dividend-paying asset. We provide two option price approximations, one based on the lower bound (termed LBA) and one based on both bounds (termed LUBA). The LUBA approximation has an average accuracy comparable to a 1,000-step binomial tree with a computation speed comparable to a 50-step binomial tree. We introduce a modification of the binomial method (termed BBSR) that is very simple to implement and performs remarkable well. We also conduct a careful large-scale evaluation of many recent methods for computing American option prices. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.read more
Citations
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Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options
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Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options
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Monte Carlo methods for security pricing
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Model specification and risk premia: evidence from futures options
TL;DR: In this paper, the authors examined model specification issues and estimates diffusive and jump risk premia using S&P futures option prices from 1987 to 2003, and developed a time series test to detect the presence of jumps in volatility and find strong evidence in support of their presence.
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Option Pricing Under a Double Exponential Jump Diffusion Model
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TL;DR: In this paper, the authors propose a jump diffusion model for asset prices whose jump sizes have a mixed-exponential distribution, which is a weighted average of exponential distributions but with possibly negative weights.
References
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The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
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Option pricing: A simplified approach☆
TL;DR: In this paper, a simple discrete-time model for valuing options is presented, which is based on the Black-Scholes model, which has previously been derived only by much more difficult methods.
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Efficient Analytic Approximation of American Option Values
TL;DR: In this article, the authors provide simple, analytic approximations for pricing exchange-traded American call and put options written on commodities and commodity futures contracts, which are accurate and considerably more computationally efficient than finite-difference, binomial, or compound-option pricing methods.
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The valuation of american put options
Journal ArticleDOI
The American Put Option Valued Analytically
Robert Geske,Herbert E. Johnson +1 more
TL;DR: An analytic solution to the American put problem is derived in this paper, where the hedge ratio and other derivatives of the solution are presented, and a polynomial expression is developed for evaluating these formulae.