On the methods of pricing American options: case study

AYDOGAN B., Aksoy U., UĞUR Ö.

ANNALS OF OPERATIONS RESEARCH, cilt.260, ss.79-94, 2018 (SCI-Expanded) identifier identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 260
  • Basım Tarihi: 2018
  • Doi Numarası: 10.1007/s10479-016-2267-4
  • Dergi Adı: ANNALS OF OPERATIONS RESEARCH
  • Derginin Tarandığı İndeksler: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Sayfa Sayıları: ss.79-94
  • Orta Doğu Teknik Üniversitesi Adresli: Evet

Özet

In this study, a comparative analysis of numerical and approximation methods for pricing American options is performed. Binomial and finite difference approximations are discussed; furthermore, Roll-Geske-Whaley, Barone-Adesi and Whaley and Bjerksund-Stensland analytical approximations as well as the least-squares Monte Carlo method of Longstaff and Schwartz are presented. Applicability and efficiency in almost all circumstances, numerical solutions of the corresponding free boundary problem is emphasized. Methods used in pricing American options are also compared on dividend and non-dividend paying assets; and their pros and cons are discussed along with numerical experiments.