We develop a exible method for evaluating European and American compound options under stochastic volatilitymodels. After discretizing the volatility process by a recombining binomial lattice until the underlying optionexpiration, the method considers the asset value as an auxiliary variable and generates subsets of representativerealizations to cover the range of possible asset prices at each time slice. A backward induction scheme using alinear interpolation technique when required is then invoked to compute both the underlying daughter option andthe compound option prices. Numerical experiments conrm the method eciency and accuracy.

Compound option pricing under stochastic volatility

Leccadito Arturo;Russo Emilio
2014

Abstract

We develop a exible method for evaluating European and American compound options under stochastic volatilitymodels. After discretizing the volatility process by a recombining binomial lattice until the underlying optionexpiration, the method considers the asset value as an auxiliary variable and generates subsets of representativerealizations to cover the range of possible asset prices at each time slice. A backward induction scheme using alinear interpolation technique when required is then invoked to compute both the underlying daughter option andthe compound option prices. Numerical experiments conrm the method eciency and accuracy.
compound options, stochastic volatility, contingent claims, binomial trees, discrete-time models.
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.11770/169236
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo

Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact