Pricing American options with uncertain volatility through stochastic linear complementarity models

Pricing American options with uncertain volatility through stochastic linear complementarity models

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Article ID: iaor20119934
Volume: 50
Issue: 2
Start Page Number: 263
End Page Number: 286
Publication Date: Oct 2011
Journal: Computational Optimization and Applications
Authors: ,
Keywords: finance & banking, stochastic processes, optimization
Abstract:

We consider the problem of pricing American options with uncertain volatility and propose two deterministic formulations based on the expected value method and the expected residual minimization method for a stochastic complementarity problem. We give sufficient conditions that ensure the existence of a solution of those deterministic formulations. Furthermore we show numerical results and discuss the usefulness of the proposed approach.

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