A robust tree method for pricing American options with CIR stochastic interest rate

Elisa Appolloni (1) , Lucia Caramellino (2) , Antonino Zanette (3)

1 UNIROMA - Università degli Studi di Roma "La Sapienza" = Sapienza University [Rome]
2 Università degli Studi di Roma Tor Vergata [Roma] = University of Rome Tor Vergata
3 MATHRISK - Mathematical Risk handling

We propose a robust and stable lattice method which permits to obtain very accurate American option prices in presence of CIR stochastic interest rate without any numerical restriction on its parameters. Numerical results show the reliability and the accuracy of the proposed method.

Domaines: Finance quantitative [q-fin.CP]

Elisa Appolloni, Lucia Caramellino, Antonino Zanette. A robust tree method for pricing American options with CIR stochastic interest rate. IMA Journal of Management Mathematics, 2015, 26 (4), pp.377-401. ⟨hal-00916441⟩