American Option Valuation Methods

Jinsha Zhao

Abstract


This paper implements and compares eight American option valuation methods: binomial, trinomial, explicit finite difference, implicit finite difference and quadratic approximation methods. And three Monte Carlo methods: bundling technique of Tilley (1993), simulated tree (ST) of Broadie, Glasserman, and Jain (1997), and least square regression method (LSM) of Longstaff and Schwartz (2001). Methods are compared in terms of computation efficiency and price accuracy. The findings suggest that binomial is the best performing numerical method in terms of accuracy and efficiency. LSM beats the other two simulation methods in terms of efficiency, accuracy and number of discrete exercise opportunities.


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DOI: https://doi.org/10.5539/ijef.v10n5p1

Copyright (c) 2018 Jinsha Zhao

License URL: http://creativecommons.org/licenses/by/4.0

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)  Email: ijef@ccsenet.org

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