A tree-based method to price American options in the Heston model

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Vellekoop, Michel and Nieuwenhuis, Hans (2009) A tree-based method to price American options in the Heston model. Journal of Computational Finance, 13 (1). pp. 1-21. ISSN 1460-1559

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Abstract:We develop an algorithm to price American options on assets that follow the stochastic volatility model defined by Heston. We use an approach which is based on a modification of a combined tree for stock prices and volatilities, where the number of nodes grows quadratically in the number of time steps. We show in a number of numerical tests that we get accurate results in a fast manner, and that features which are essential for the practical use of stock option pricing algorithms, such as the incorporation of cash dividends and a term structure of interest rates, can easily be incorporated.
Item Type:Article
Copyright:© 2009 Incisive Media
Faculty:
Electrical Engineering, Mathematics and Computer Science (EEMCS)
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Link to this item:http://purl.utwente.nl/publications/81504
Official URL:http://www.risk.net/type/journal/source/journal-of-computational-finance
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