Richardson extrapolation techniques for the pricing of American-style options

Chuang Chang Chang, San Lin Chung, Richard C. Stapleton

Research output: Contribution to journalArticlepeer-review

42 Scopus citations


In this article, the authors reexamine the American-style option pricing formula of R. Geske and H.E. Johnson (1984), and extend the analysis by deriving a modified formula that can overcome the possibility of nonuniform convergence (which is likely to occur for nonstandard American options whose exercise boundary is discontinuous) encountered in the original Geske-Johnson methodology. Furthermore, they propose a numerical method, the Repeated-Richardson extrapolation, which allows the estimation of the interval of true option values and the determination of the number of options needed for an approximation to achieve a given desired accuracy. Using simulation results, our modified Geske-Johnson formula is shown to be more accurate than the original Geske-Johnson formula for pricing American options, especially for nonstandard American options. This study also illustrates that the Repeated-Richardson extrapolation approach can estimate the interval of true American option values extremely well. Finally, the authors investigate the possibility of combining the binomial Black-Scholes method proposed by M. Broadie and J.B. Detemple (1996) with the Repeated-Richardson extrapolation technique.

Original languageEnglish
Pages (from-to)791-817
Number of pages27
JournalJournal of Futures Markets
Issue number8
StatePublished - Aug 2007


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