The early exercise premium in American put option prices
نویسندگان
چکیده
This study estimates the value of the early exercise premium in American put option prices using Swedish equity options data. The value of the premium is found as the deviation of the American put price from European put-call parity, and in addition a theoretical estimate of the premium is computed. The empirically found premium is also used in a modified version of the control variate approach to value American puts. The results indicate a substantial value of the early exercise premium, where the premium derived from put-call parity is higher than the theoretical premium. The premium also increases with moneyness and time left to expiration, while the effect of interest rate and volatility depends on the moneyness of the option. The modified control variate technique works reasonably well relative to the theoretical models. In particular, for deep in-the-money options, this technique is superior. © 2000 Elsevier Science B.V. All rights reserved. JEL classification: G10; G13
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