A Shannon Wavelet Method for Pricing American Options under Two-Factor Stochastic Volatilities and Stochastic Interest Rate

Abstract EN

In the paper, the pricing of the American put options under the double Heston model with Cox–Ingersoll–Ross (CIR) interest rate process is studied.

The characteristic function of the log asset price is derived, and thereby Bermuda options are well evaluated by means of a state-of-the-art Shannon wavelet inverse Fourier technique (SWIFT), which is a robust and highly efficient pricing method.

Based on the SWIFT method, the price of American option can be approximated by using Richardson extrapolation schemes on a series of Bermudan options.

Numerical experiments show that the proposed pricing method is efficient, especially for short-term American put options.