- A tree-based method to price American options in the Heston model
- Journal of Computational Finance
- Volume | Issue number
- 13 | 1
- Pages (from-to)
- Number of pages
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
We develop an algorithm to price American options on assets that follow the stochastic volatility model defined by Heston. We use an approach which is based on a modification of a combined tree for stock prices and volatilities, where the number of nodes grows quadratically in the number of time steps. We show in a number of numerical tests that we get accurate results in a fast manner, and that features which are essential for the practical use of stock option pricing algorithms, such as the incorporation of cash dividends and a term structure of interest rates, can easily be incorporated.
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