Skip to main content

Main menu

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JOD
    • Editorial Board
    • Published Ahead of Print (PAP)
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

User menu

  • Sample our Content
  • Subscribe Now
  • Log in

Search

  • ADVANCED SEARCH: Discover more content by journal, author or time frame
The Journal of Derivatives
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Sample our Content
  • Subscribe Now
  • Log in
The Journal of Derivatives

The Journal of Derivatives

ADVANCED SEARCH: Discover more content by journal, author or time frame

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JOD
    • Editorial Board
    • Published Ahead of Print (PAP)
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter
Article

Pricing American Options in the Heston Model:
A Close Look at Incorporating Correlation

Peter Ruckdeschel, Tilman Sayer and Alexander Szimayer
The Journal of Derivatives Spring 2013, 20 (3) 9-29; DOI: https://doi.org/10.3905/jod.2013.20.3.009
Peter Ruckdeschel
is a research associate at the Department of Financial Mathematics at Fraunhofer ITWM, Kaiserslautern in Germany.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: peter.ruckdeschel@itwm.fraunhofer.de
Tilman Sayer
is a research associate at the Department of Financial Mathematics at Fraunhofer ITWM, Kaiserslautern in Germany.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: tilman.sayer@itwm.fraunhofer.de
Alexander Szimayer
is a professor of finance in the University of Hamburg, School of Business, Economics and Social Sciences in Hamburg, Germany.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: alexander.szimayer@wiso. uni-hamburg.de
  • Article
  • Info & Metrics
  • PDF (Subscribers Only)
Loading

Click to login and read the full article.
Don’t have access? Sign up today to begin your trial to the PMR platform 

Abstract

The Binomial model and similar lattice methods are workhorses of practical derivatives valuation. But returns processes more realistic than lognormal diffusions with constant parameters easily create difficulties for them. One of the most important extensions of the Black-Scholes paradigm is to allow stochastic volatility, but even nonstochastic timevarying volatility destroys the important property that the tree recombines, which limits the growth in the number of nodes as time advances. Stochastic volatility introduces a second random variable, which then requires adding another dimension to the tree, under the constraint that the return and volatility changes must maintain the same degree of correlation as in the data. The Heston model features correlation in return and volatility shocks, but building it into a lattice is tricky. In this article, Ruckdeschel, Sayer, and Szimayer develop a lattice method that begins with a binomial tree for the volatility and a trinomial tree for stock price, and then connects them in such a way that the empirical degree of correlation between return and volatility is maintained. Efficiency relative to existing methods is increased, and in some cases it is possible to improve performance further by matching higher moments as well.

  • © 2013 Pageant Media Ltd
View Full Text

Don’t have access? Register today to begin unrestricted access to our database of research.

Log in using your username and password

Forgot your user name or password?
PreviousNext
Back to top

Explore our content to discover more relevant research

  • By topic
  • Across journals
  • From the experts
  • Monthly highlights
  • Special collections

In this issue

The Journal of Derivatives: 20 (3)
The Journal of Derivatives
Vol. 20, Issue 3
Spring 2013
  • Table of Contents
  • Index by author
Print
Download PDF
Article Alerts
Sign In to Email Alerts with your Email Address
Email Article

Thank you for your interest in spreading the word on The Journal of Derivatives.

NOTE: We only request your email address so that the person you are recommending the page to knows that you wanted them to see it, and that it is not junk mail. We do not capture any email address.

Enter multiple addresses on separate lines or separate them with commas.
Pricing American Options in the Heston Model: A Close Look at Incorporating Correlation
(Your Name) has sent you a message from The Journal of Derivatives
(Your Name) thought you would like to see the The Journal of Derivatives web site.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Citation Tools
Pricing American Options in the Heston Model:
A Close Look at Incorporating Correlation
Peter Ruckdeschel, Tilman Sayer, Alexander Szimayer
The Journal of Derivatives Feb 2013, 20 (3) 9-29; DOI: 10.3905/jod.2013.20.3.009

Citation Manager Formats

  • BibTeX
  • Bookends
  • EasyBib
  • EndNote (tagged)
  • EndNote 8 (xml)
  • Medlars
  • Mendeley
  • Papers
  • RefWorks Tagged
  • Ref Manager
  • RIS
  • Zotero
Save To My Folders
Share
Pricing American Options in the Heston Model:
A Close Look at Incorporating Correlation
Peter Ruckdeschel, Tilman Sayer, Alexander Szimayer
The Journal of Derivatives Feb 2013, 20 (3) 9-29; DOI: 10.3905/jod.2013.20.3.009
del.icio.us logo Digg logo Reddit logo Twitter logo CiteULike logo Facebook logo Google logo LinkedIn logo Mendeley logo
Tweet Widget Facebook Like LinkedIn logo

Jump to section

  • Article
    • Abstract
    • SETUP AND NOTATION
    • COMBINING THE TREES AND MATCHING CORRELATION
    • NUMERICS
    • CONCLUSION AND OUTLOOK
    • A. PROOFS
    • ENDNOTE
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

Similar Articles

Cited By...

  • No citing articles found.
  • Google Scholar

More in this TOC Section

  • Editor’s Letter
  • Editor’s Letter
  • Interviews with Researchers Who Started Their Career in Physics but Moved to Finance
Show more Article
LONDON
One London Wall, London, EC2Y 5EA
United Kingdom
+44 207 139 1600
 
NEW YORK
41 Madison Avenue, New York, NY 10010
USA
+1 646 931 9045
pm-research@pageantmedia.com
 

Stay Connected

  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

MORE FROM PMR

  • Home
  • Awards
  • Investment Guides
  • Videos
  • About PMR

INFORMATION FOR

  • Academics
  • Agents
  • Authors
  • Content Usage Terms

GET INVOLVED

  • Advertise
  • Publish
  • Article Licensing
  • Contact Us
  • Subscribe Now
  • Log In
  • Update your profile
  • Give us your feedback

© 2021 Pageant Media Ltd | All Rights Reserved | ISSN: 1074-1240 | E-ISSN: 2168-8524

  • Site Map
  • Terms & Conditions
  • Privacy Policy
  • Cookies