Discrete-Time Valuation of American Options with Stochastic Interest Rates

1995 ◽  
Vol 8 (1) ◽  
pp. 193-234 ◽  
Author(s):  
Kaushik I. Amin ◽  
James N. Bodurtha
Keyword(s):  
Interest Rates ◽  
Discrete Time ◽  
American Options ◽  
Stochastic Interest Rates ◽  
Stochastic Interest

scholarly journals Convergence of discrete time option pricing models under stochastic interest rates

2000 ◽  
Vol 4 (1) ◽  
pp. 81-93 ◽  
Author(s):  
J.-P. Lesne ◽  
J.-L. Prigent ◽  
O. Scaillet
Keyword(s):  
Option Pricing ◽  
Interest Rates ◽  
Discrete Time ◽  
Pricing Models ◽  
Stochastic Interest Rates ◽  
Stochastic Interest

scholarly journals American Options on High Dividend Securities: A Numerical Investigation

Risks ◽  
2019 ◽  
Vol 7 (2) ◽  
pp. 59
Author(s):  
Francesco Rotondi
Keyword(s):  
Interest Rates ◽  
American Options ◽  
Least Square Method ◽  
American Option ◽  
Least Square ◽  
Stochastic Interest Rates ◽  
Stochastic Interest ◽  
Black Scholes ◽  
Ill Posed ◽  
European Counterpart

I document a sizeable bias that might arise when valuing out of the money American options via the Least Square Method proposed by Longstaff and Schwartz (2001). The key point of this algorithm is the regression-based estimate of the continuation value of an American option. If this regression is ill-posed, the procedure might deliver biased results. The price of the American option might even fall below the price of its European counterpart. For call options, this is likely to occur when the dividend yield of the underlying is high. This distortion is documented within the standard Black–Scholes–Merton model as well as within its most common extensions (the jump-diffusion, the stochastic volatility and the stochastic interest rates models). Finally, I propose two easy and effective workarounds that fix this distortion.

Sign in / Sign up

Export Citation Format

Share Document