Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/62928
Authors: 
Tzavalis, Elias
Wang, Shijun
Year of Publication: 
2003
Series/Report no.: 
Working Paper, Department of Economics, Queen Mary, University of London 488
Abstract: 
This paper presents a new numerical method for pricing American call options when the volatility of the price of the underlying stock is stochastic. By exploiting a log-linear relationship of the optimal exercise boundary with respect to volatility changes, we derive an integral representation of an American call price and the early exercise premium which holds under stochastic volatility. This representation is used to develop a numerical method for pricing the American options based on an approximation of the optimal exercise boundary by Chebyshev polynomials. Numerical results show that our numerical approach can quickly and accurately price American call options both under stochastic and/or constant volatility.
Subjects: 
American call option, Stochastic volatility, Early exercise boundary, Chebyshev polynomials
JEL: 
G12
G13
C63
Document Type: 
Working Paper

Files in This Item:
File
Size
531.12 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.