Calibration to American options: numerical investigation of the de-americanization method

DOI10.1080/14697688.2017.1417622zbMATH Open1400.91581arXiv1611.06181OpenAlexW2555603589WikidataQ55666903 ScholiaQ55666903MaRDI QIDQ4554482FDOQ4554482

Authors: O. Burkovska, Maximilian Gaß, Kathrin Glau, Mirco Mahlstedt, Wim Schoutens, B. Wohlmuth 

Publication date: 14 November 2018

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: American options are the reference instruments for the model calibration of a large and important class of single stocks. For this task, a fast and accurate pricing algorithm is indispensable. The literature mainly discusses pricing methods for American options that are based on Monte Carlo, tree and partial differential equation methods. We present an alternative approach that has become popular under the name de-Americanization in the financial industry. The method is easy to implement and enjoys fast run-times. Since it is based on ad hoc simplifications, however, theoretical results guaranteeing reliability are not available. To quantify the resulting methodological risk, we empirically test the performance of the de-Americanization method for calibration. We classify the scenarios in which de-Americanization performs very well. However, we also identify the cases where de-Americanization oversimplifies and can result in large errors.

Full work available at URL: https://arxiv.org/abs/1611.06181

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zbMATH Keywords

CEV modelvariational inequalitiesAmerican optionsmodel reductionbinomial tree modelHeston modelmodel calibrationLévy models

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (2)

• On a neural network to extract implied information from American options
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