A Simple Approach to Pricing American Options Under the Heston Stochastic Volatility Model

Posted: 21 May 2019

See all articles by Natalia Beliaeva

Natalia Beliaeva

Suffolk University - Department of Finance

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management

Date Written: February 28, 2010

Abstract

In a recent paper, NBZ [2010] present a multidimensional transform for generating path-independent trees for pricing American options under low dimensional stochastic volatility models. For this class of models, this approach has higher accuracy than the GARCH tree method of Ritchken and Trevor [1999], and is computationally more efficient than the Monte Carlo regression method of Longstaff and Schwartz [2001] as well as the lattice method of Leisen [2000]. In this paper, we give an explicit demonstration of the NBZ transform using the specific example of the Heston [1993] stochastic volatility model. This approach obtains highly accurate American option prices within a fraction of a second using the control variate method.

Keywords: Heston, options, stochastic volatility, American options, trees

JEL Classification: G0, G11, G12, G13, G20, G21, G22, G23, G24

Suggested Citation

Beliaeva, Natalia and Nawalkha, Sanjay K., A Simple Approach to Pricing American Options Under the Heston Stochastic Volatility Model (February 28, 2010). https://doi.org/10.3905/jod.2010.17.4.025. Available at SSRN: https://ssrn.com/abstract=1107934 or http://dx.doi.org/10.2139/ssrn.1107934

Natalia Beliaeva

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States

Sanjay K. Nawalkha (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-687-2561 (Phone)

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