Nonparametric American Option Pricing

Abstract

We introduce a nonparametric method to accurately price American style contingent claims. This method uses only historical stock price data, not option price data, to generate the American option price. We test the accuracy of this method in a controlled experimental environment under both Black & Scholes (1973) and Heston (1993) assumptions and perform an error-metric analysis. These numerical experiments demonstrate that this method is an accurate and precise method of pricing American options under a variety of market conditions.

Keywords: Option pricing, American options, nonparametric methods, entropy

JEL Classification: G13