Pricing American Options with Stochastic Volatility: Evidence from S&P 500 Futures Options

• Main Authors: Lim, Kian Guan, Guo, X. Q.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2000
• Subjects: Business
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2131; https://proquest.umi.com/pqdlink?did=57654421&sid=15&Fmt=3&clientId=44274&RQT=309&VName=PQD
• Institution: Singapore Management University

This article tests empirically a numerical solution to price American options under stochastic volatility. The model allows for a mean-reverting stochastic-volatility process with non-zero risk premium for the volatility risk and correlation with the underlying process. A general solution of risk-neutral probabilities and price movements is derived. The empirical test shows clear evidence supporting the occurrence of stochastic volatility. The stochastic-volatility model outperforms the constant-volatility model by producing smaller bias and better goodness of fit in both the in-sample and out-of-sample test