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 | |
| Publication status | Published - 2015 Jan 1 |
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All Science Journal Classification (ASJC) codes
- Finance
- Economics, Econometrics and Finance (miscellaneous)
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On pricing options with stressed-beta in a reduced form model. / Kim, Geonwoo; Lim, Hyuncheul; Lee, Sung chul.
In: Review of Derivatives Research, Vol. 18, No. 1, 01.01.2015, p. 29-50.Research output: Contribution to journal › Article
TY - JOUR
T1 - On pricing options with stressed-beta in a reduced form model
AU - Kim, Geonwoo
AU - Lim, Hyuncheul
AU - Lee, Sung chul
PY - 2015/1/1
Y1 - 2015/1/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84925484882&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84925484882&partnerID=8YFLogxK
U2 - 10.1007/s11147-014-9103-2
DO - 10.1007/s11147-014-9103-2
M3 - Article
AN - SCOPUS:84925484882
VL - 18
SP - 29
EP - 50
JO - Review of Derivatives Research
JF - Review of Derivatives Research
SN - 1380-6645
IS - 1
ER -