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

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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.