Comparison of Numerical Methods for Option Pricing

59 Pages Posted: 18 Feb 2008

Date Written: December 2006

Abstract

This study goes through a range of methods for option pricing. We begin with the celebrated Black-Scholes formula, and then we begin examining methods that do not provide closed-form solutions, namely the finite-difference method, binomial tree and simulations. We examine the accuracy of Least Squares Monte Carlo method, and we also examine how simulation can be used for options with stochastic volatilities.

We used GAUSS v3.2.32 to develop the routines of the algorithms we had to examine. The routines were compiled on a single desktop with a 2.6 GHz Intel Pentium Processor and 1GB RAM. Analytic results of al the methods are cited, and extra weight is given to simulations.

Suggested Citation

Mourtzanos, Nikolaos, Comparison of Numerical Methods for Option Pricing (December 2006). Available at SSRN: https://ssrn.com/abstract=1093408 or http://dx.doi.org/10.2139/ssrn.1093408

Nikolaos Mourtzanos (Contact Author)

affiliation not provided to SSRN

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