Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger

A tree-based method to price American options in the Heston model
Michel Vellekoop, Hans Nieuwenhuis
Abstract
ABSTRACT
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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Copyright Infopro Digital Limited. All rights reserved.
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