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

DOI10.1080/14697688.2017.1417622MaRDI QIDQ4554482zbMATH OpenOpenAlexWikidataFDO

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)

Full work available at URL https://arxiv.org/abs/1611.06181, http://europepmc.org/articles/pmc6034575

zbMATH Keywords

American optionsbinomial tree modelCEV modelHeston modelLévy modelsmodel calibrationmodel reductionvariational inequalities

Mathematics Subject Classification ID

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

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.

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Cited in

(4)

• scientific article; zbMATH DE number 5346998 (Why is no real title available?)
• On a neural network to extract implied information from American options
• NN de-Americanization: an efficient method to facilitate calibration of American-style options
• Joint arbitrage-free smoothing of American call and put options surfaces

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