An Optimization Approach to Computing the Implied Volatility of American Options

Arun Sen (asenprinceton.edu)

Abstract: We present a method to compute the implied volatility of American options as a mathematical program with equilibrium constraints. The formulation we present is new, as are the convergence results we prove. The algorithm holds the promise of being practical to implement, and we demonstrate some preliminary numerical results to this end.

Keywords: finance, optimization, MPEC's

Category 1: Applications -- OR and Management Sciences (Finance and Economics )

Category 2: Nonlinear Optimization

Category 3: Complementarity and Variational Inequalities

Citation: Princeton University working paper, February 2005

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Entry Submitted: 02/21/2005
Entry Accepted: 02/22/2005
Entry Last Modified: 02/21/2005

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