American Option Valuation Methods

Zhao, Jinsha (2018) American Option Valuation Methods. International Journal of Economics and Finance, 10(5), ISSN (print) 1916-971X

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Abstract

This paper implements and compares eight American option valuation methods: binomial, trinomial, explicit finite difference, implicit finite difference and quadratic approximation methods. And three Monte Carlo methods: bundling technique of Tilley (1993), simulated tree (ST) of Broadie, Glasserman, and Jain (1997), and least square regression method (LSM) of Longstaff and Schwartz (2001). Methods are compared in terms of computation efficiency and price accuracy. The findings suggest that binomial is the best performing numerical method in terms of accuracy and efficiency. LSM beats the other two simulation methods in terms of efficiency, accuracy and number of discrete exercise opportunities.

Item Type: Article
Research Area: Accounting and finance
Faculty, School or Research Centre: Kingston Business School
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Depositing User: Jinsha Zhao
Date Deposited: 10 Apr 2018 08:30
Last Modified: 06 Aug 2018 15:14
DOI: https://doi.org/10.5539/ijef.v10n5p1
URI: http://eprints.kingston.ac.uk/id/eprint/40911

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