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Non-parametric American option valuation using Cressie–Read divergences

Author

Listed:
  • Jamie Alcock

    (University of Sydney Business School, The University of Sydney, Australia)

  • Godfrey Smith

    (School of Mathematics and Physics, The University of Queensland, Australia)

Abstract

In this paper we build on the possibility that the use of the Cressie–Read family with the non-parametic method for valuing European option might be extended to non-parametric valuation of American options. We derive a suite of non-parametric methods to price and hedge American-style options, utilising the Cressie-Read family of divergences. We test the efficacy of these methods using a large sample of traded American-style options struck on the S&P100 index. We find that in general, our suite of non-parametric valuation schemes generate more accurate price estimates than traditional parametric schemes, especially for longer-dated options.

Suggested Citation

  • Jamie Alcock & Godfrey Smith, 2017. "Non-parametric American option valuation using Cressie–Read divergences," Australian Journal of Management, Australian School of Business, vol. 42(2), pages 252-275, May.
    • Handle: RePEc:sae:ausman:v:42:y:2017:i:2:p:252-275
    DOI: 10.1177/0312896215622799
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    References listed on IDEAS

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    Cited by:

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    2. Adrian Gepp & Geoff Harris & Bruce Vanstone, 2020. "Financial applications of semidefinite programming: a review and call for interdisciplinary research," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3527-3555, December.

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    More about this item

    Keywords

    American options; Cressie–Read family; non-parametric methods;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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