Comprehensive Studies on Using the Richardson extrapolation techniques for Pricing American options under Alternative Stochastic Processes

Abstract

[[abstract]]Following from the innovation of Geske and Johnson (1984), the Richardson extrapolation technique is frequently used to price American options. Therefore it is very nature for one to ask the following questions: Is it always appropriate to use the Richardson extrapolation technique to value American options? In this study, we try to answer the above critical issue by investigating the valuation of American options using the Richardson extrapolation technique under alternative stochastic processes. Additionally, following from Chang, Chung and Stapleton (2007), we apply the Repeated-Richardson extrapolation method to estimate the interval of true American option values and to determine the number of options needed for an approximation to achieve a given desired accuracy. We then test the feasibility of the estimated error bounds of the American options under alternative stochastic processes as well. Our numerical results show that on average the Repeated-Richardson extrapolation technique outperforms the Richardson extrapolation technique for the valuation of American options under alternative stochastic processes