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
Date Written: August 1, 2009
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: Suggested Citation