This service is more advanced with JavaScript available, learn more at http: This paper develops a new numerical technique to price an American option written upon an underlying asset that follows a bivariate diffusion process. The technique presented here exploits the supermartingale representation of an American option price together with a coarse approximation of its early exercise surface that is based on an efficient implementation of the least-squares Monte—Carlo algorithm LSM of Longstaff and Schwartz Rev Financ Stud Our approach also has the advantage of avoiding two main issues associated with LSM, namely its inherent bias and the basis functions selection problem.

Extensive numerical results show that our approach yields very accurate prices in a computationally efficient manner. Finally, the flexibility of our method allows for its extension to a much larger class of optimal stopping problems than addressed in this paper. Part of Springer Nature. Not logged in Not affiliated American option pricing under stochastic volatility: Original Paper First Online: Cite this article as: Comput Manag Sci 7: AitSahlia F, Lai T Exercise boundaries and efficient approximations to American option prices and hedge parameters.

J Comput Finance 4: AitSahlia F, Lai TL A canonical optimal stopping problem for American options and its numerical solution. J Comput Finance 3: Black F, Scholes M The pricing of options and corporate liabilities. J Polit Econ Broadie M, Detemple J, Ghysels E, Torres O American options with stochastic dividends and volatility: Carr P, Jarrow R, Myneni R Alternative characterizations of American put options.

Chiarella C, Ziogas A Pricing American options under stochastic volatility. Computing in Economics and Finance, 77, Society for Computational Economics. Clement E, Lamberton D, Protter P An analysis of a least squares regression method for American option pricing.

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The Journal of Derivatives: List of Issues

Heston S A closed-form solution for options with stochastic volatility with applications to bond and currency options. Rev Financ Stud 6 2: Jacka SD Optimal stopping and the American put.

Jamshidian F An analysis of American options. Rev Futures Mark Kim IJ The analytical approximation for the American options. Rev Financ Stud 3: Longstaff FA, Schwartz ES Valuing American options by simulation: A simple least-squares approach.

Rev Financ Stud Merton RC Theory of rational option pricing. Bell J Econ Manage Sci 4: Milstein GN A method of second-order accuracy integration of stochastic differential equations.

Efficient numerical methods for pricing American options under stochastic volatility - Ikonen - - Numerical Methods for Partial Differential Equations - Wiley Online Library

Theory Probab Appl Moreno M, Navas J On the robustness of least-squares Monte-Carlo lsm for pricing American derivatives. Rev Derivatives Res 6: Talay D How to discretize stochastic differential equations, pp. Lecture Notes in Mathematics vol Tianhai T, Burrage K Accuracy issues of Monte-Carlo methods for valuing American options. ANZIAM J Aust Math Soc Zhou Y On the existence of an optimal regression complexity in the least-squares Monte-Carlo lsm framework for option pricing.

Proceedings, 39th Actuarial Research Conference, Society of Actuaries. Department of Industrial and Systems Engineering, Weil Hall University of Florida Gainesville USA. Publisher Name Springer-Verlag Print ISSN X Online ISSN About this journal Reprints and Permissions. Source Sans Pro, Helvetica, Arial, sans-serif; font-size: Unlimited access to the full article Instant download Include local sales tax if applicable.

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