Non-parametric American option valuation using Cressie–Read divergences. (May 2017)

• Record Type: Journal Article
• Authors: Alcock, Jamie; Smith, Godfrey
• Is Part Of: Australian journal of management. Volume 42:Number 2(2017:May)
• Page Start: 252
• Page End: 275
• Publication Date: 2017-05
• Subjects: American options -- Cressie–Read family -- non-parametric methods; G13 -- C14; Management -- Periodicals; Management -- Australia -- Periodicals; Business enterprises -- Finance -- Periodicals; Industrial management -- Australia -- Periodicals; 330
• DOI: 10.1177/0312896215622799
• Languages: English
• ISSNs: 0312-8962

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.