A fast Fourier transform technique for pricing American options under stochastic volatility |
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Authors: | Oleksandr Zhylyevskyy |
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Institution: | 1.Department of Economics,Iowa State University,Ames,USA |
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Abstract: | This paper develops a non-finite-difference-based method of American option pricing under stochastic volatility by extending
the Geske-Johnson compound option scheme. The characteristic function of the underlying state vector is inverted to obtain
the vector’s density using a kernel-smoothed fast Fourier transform technique. The method produces option values that are
closely in line with the values obtained by finite-difference schemes. It also performs well in an empirical application with
traded S&P 100 index options. The method is especially well suited to price a set of options with different strikes on the
same underlying asset, which is a task often encountered by practitioners. |
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Keywords: | |
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