Department of Applied Mathematics & Physics, Kyoto University

Technical Report 2010-004 (February 19, 2010)

Pricing American Options with Uncertain Volatility through Stochastic Linear Complementarity Models
by Kenji Hamatani and Masao Fukushima

pdf File

We consider the problem of pricing American options with uncertain volatility and propose two deterministic formulations based on the expected value method and the expected residual minimization method for a stochastic complementarity problem. We give sufficient conditions that ensure the existence of a solution of those deterministic formulations. Furthermore we show numerical results and discuss the usefulness of the proposed approach.