American Options on High Dividend Securities: A Numerical Investigation

Risks

Francesco Rotondi¹ 

[1] Department of Finance, Bocconi University, 20136 Milan, Italy;

关键词: American options;    least square method;    derivatives pricing;    binomial tree;    stochastic interest rates;    quadrinomial tree;   

DOI  :  10.3390/risks7020059

来源: DOAJ

【 摘 要 】

I document a sizeable bias that might arise when valuing out of the money American options via the Least Square Method proposed by Longstaff and Schwartz (2001). The key point of this algorithm is the regression-based estimate of the continuation value of an American option. If this regression is ill-posed, the procedure might deliver biased results. The price of the American option might even fall below the price of its European counterpart. For call options, this is likely to occur when the dividend yield of the underlying is high. This distortion is documented within the standard Black−Scholes−Merton model as well as within its most common extensions (the jump-diffusion, the stochastic volatility and the stochastic interest rates models). Finally, I propose two easy and effective workarounds that fix this distortion.

【 授权许可】

Unknown