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G-2012-58

American-style options in jump-diffusion models: Estimation and evaluation

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We propose a quasi-analytical approach for valuing American-style options under Gaussian and double exponential jumps à la Merton (1976) and Kou (2002). Our approach is based on dynamic programming coupled with finite elements. Finally, we perform a numerical experiments that show convergence and efficiency. We also address the estimation problem and report an empirical investigation based on Home Depot. Jump-diffusion models outperform pure-diffusion models.

, 18 pages

This cahier was revised in February 2015

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