Developing a Risk-Based Approach for American Basket Option Pricing

Developing a Risk-Based Approach for American Basket Option Pricing Comput Econ https://doi.org/10.1007/s10614-018-9826-5 Developing a Risk-Based Approach for American Basket Option Pricing 1 1 Ehsan Hajizadeh · Masoud Mahootchi Accepted: 28 May 2018 © Springer Science+Business Media, LLC, part of Springer Nature 2018 Abstract Options are one of the important financial contracts for reducing the risk of investors. Many active practitioners in the financial markets really believe that mispricing or incorrect valuation of these securities would be the main reason of collapse of some financial institutions. The complexity of option pricing/valuation, especially in the case of American basket options, as high dimensional options, has motivated many researchers to develop numerical and simulation-based models. In this paper, a new simulation-based approach for pricing/valuation of American bas- ket option with risk consideration is proposed. Having the prices obtained through Longstaff–Schwartz methodology, which is based on Approximate Dynamic Pro- gramming as a risk-neutral approach, we propose a new approach for pricing the American basket option according to the worst-case (pessimistic/risk-averse) and the best-case (optimistic/risk-taking) scenarios. Furthermore, for scenarios generation, we use a Monte Carlo simulation technique using a t-student copula-GARCH method and Extreme Value Theory to handle the nonlinearity of dependencies between variables. To verify the computational efficiency and the accuracy of http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Computational Economics Springer Journals

Developing a Risk-Based Approach for American Basket Option Pricing

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Publisher
Springer Journals
Copyright
Copyright © 2018 by Springer Science+Business Media, LLC, part of Springer Nature
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Computer Appl. in Social and Behavioral Sciences; Operations Research/Decision Theory; Behavioral/Experimental Economics; Math Applications in Computer Science
ISSN
0927-7099
eISSN
1572-9974
D.O.I.
10.1007/s10614-018-9826-5
Publisher site
See Article on Publisher Site

Abstract

Comput Econ https://doi.org/10.1007/s10614-018-9826-5 Developing a Risk-Based Approach for American Basket Option Pricing 1 1 Ehsan Hajizadeh · Masoud Mahootchi Accepted: 28 May 2018 © Springer Science+Business Media, LLC, part of Springer Nature 2018 Abstract Options are one of the important financial contracts for reducing the risk of investors. Many active practitioners in the financial markets really believe that mispricing or incorrect valuation of these securities would be the main reason of collapse of some financial institutions. The complexity of option pricing/valuation, especially in the case of American basket options, as high dimensional options, has motivated many researchers to develop numerical and simulation-based models. In this paper, a new simulation-based approach for pricing/valuation of American bas- ket option with risk consideration is proposed. Having the prices obtained through Longstaff–Schwartz methodology, which is based on Approximate Dynamic Pro- gramming as a risk-neutral approach, we propose a new approach for pricing the American basket option according to the worst-case (pessimistic/risk-averse) and the best-case (optimistic/risk-taking) scenarios. Furthermore, for scenarios generation, we use a Monte Carlo simulation technique using a t-student copula-GARCH method and Extreme Value Theory to handle the nonlinearity of dependencies between variables. To verify the computational efficiency and the accuracy of

Journal

Computational EconomicsSpringer Journals

Published: Jun 5, 2018

References

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