Non-parametric American option valuation using Cressie–Read divergences

Abstract

In this paper we build on the possibility that the use of the Cressie–Read family with the non-parametic method for valuing European option might be extended to non-parametric valuation of American options. We derive a suite of non-parametric methods to price and hedge American-style options, utilising the Cressie-Read family of divergences. We test the efficacy of these methods using a large sample of traded American-style options struck on the S&P100 index. We find that in general, our suite of non-parametric valuation schemes generate more accurate price estimates than traditional parametric schemes, especially for longer-dated options.

Financial applications of semidefinite programming: a review and call for interdisciplinary research

“…An area of further research interest would be comparing SDP with other approaches. For example, the efficiency of Alcock and Smith's (2017) unique non-parametric approach to value American options using Cressie-Read divergences, could be compared to an SDP solution.…”