American Option Valuation: Implied Calibration of GARCH Pricing-Models

Journal of Futures Markets, Vol. 31, No. 10, 2011

36 Pages Posted: 9 Sep 2009 Last revised: 10 May 2017

See all articles by Michael Weber

Michael Weber

University of Chicago - Finance

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: August 1, 2009

Abstract

This article analyzes the issue of American option valuation when the underlying exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation-based methods being considered in previous studies. The EBT-based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach.

Keywords: American Options, GARCH, Implied Calibration, Edgeworth Binomial Tree

JEL Classification: G13, C22, C51

Suggested Citation

Weber, Michael and Prokopczuk, Marcel, American Option Valuation: Implied Calibration of GARCH Pricing-Models (August 1, 2009). Journal of Futures Markets, Vol. 31, No. 10, 2011, Available at SSRN: https://ssrn.com/abstract=1470686 or http://dx.doi.org/10.2139/ssrn.1470686

Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Marcel Prokopczuk (Contact Author)

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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