The aim of this paper is to price an American option in a multiperiod binomial model,when there is uncertainty on the volatility of the underlying asset.American option valuation is usually performed, under the risk-neutralvaluation paradigm, by using numerical procedures such as the binomialoption pricing model of Cox, Ross, Rubinstein (1979). A key input of themultiperiod binomial model is the volatility of the underlying asset,that is an unobservable parameter.As it is hard to give a precise estimate forthe volatility, in this paper we use a possibility distribution in order to modelthe uncertainty on the volatility. Possibility distributions are one of the mostpopular mathematical tools for modelling uncertainty. The standard risk-neutralvaluation paradigm requires the derivation of the risk-neutral probabilities, thatin a one period binomial model boils down to the solution of a linear system ofequations. As a consequence of the uncertainty in the volatility, we obtain apossibility distribution on the risk-neutral probabilities. Under these measures,we perform the risk-neutral valuation of the American option.
American Option Pricing with Imprecise Risk-Neutral Probabilities / Muzzioli, Silvia; H., Reynaerts. - In: INTERNATIONAL JOURNAL OF APPROXIMATE REASONING. - ISSN 0888-613X. - STAMPA. - 49(2008), pp. 140-147.
Data di pubblicazione: | 2008 |
Titolo: | American Option Pricing with Imprecise Risk-Neutral Probabilities |
Autore/i: | Muzzioli, Silvia; H., Reynaerts |
Autore/i UNIMORE: | |
Digital Object Identifier (DOI): | http://dx.doi.org/10.1016/j.ijar.2007.06.011 |
Rivista: | |
Volume: | 49 |
Pagina iniziale: | 140 |
Pagina finale: | 147 |
Codice identificativo ISI: | WOS:000259436000012 |
Codice identificativo Scopus: | 2-s2.0-48849117689 |
Citazione: | American Option Pricing with Imprecise Risk-Neutral Probabilities / Muzzioli, Silvia; H., Reynaerts. - In: INTERNATIONAL JOURNAL OF APPROXIMATE REASONING. - ISSN 0888-613X. - STAMPA. - 49(2008), pp. 140-147. |
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