On pricing options with stressed-beta in a reduced form model

Geonwoo Kim; Hyuncheul Lim; Sungchul Lee

doi:10.1007/s11147-014-9103-2

On pricing options with stressed-beta in a reduced form model

Geonwoo Kim, Hyuncheul Lim, Sungchul Lee

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

Abstract

We consider the valuation of options with stressed-beta in a reduced form model. Under this two-state beta model, we provide the analytic pricing formulae for the European options and American options as the integral forms. Specifically, we provide the integral representation of the early exercise premium of an American put option. We use the quadrature method to evaluate the integral forms and we measure the performance of our pricing framework comparing the benchmarks set by the trinomial tree method. It turns out that our pricing framework with the quadrature methods are computationally efficient and accurate. We also calibrate the market data successfully.

Original language	English
Pages (from-to)	29-50
Number of pages	22
Journal	Review of Derivatives Research
Volume	18
Issue number	1
DOIs	https://doi.org/10.1007/s11147-014-9103-2
Publication status	Published - 2015 Apr

Bibliographical note

Funding Information:
This research was supported by Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science and Technology (No. NRF-2013R1A1A2004762).

Publisher Copyright:
© 2014, Springer Science+Business Media New York.

All Science Journal Classification (ASJC) codes

Finance
Economics, Econometrics and Finance (miscellaneous)

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10.1007/s11147-014-9103-2

Cite this

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On pricing options with stressed-beta in a reduced form model

Abstract

Bibliographical note

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