A Shannon Wavelet Method for Pricing American Options under Two-Factor Stochastic Volatilities and Stochastic Interest Rate

In the paper, the pricing of the American put options under the double Heston model with Cox-Ingersoll-Ross (CIR) interest rate process is studied. The characteristic function of the log asset price is derived, and thereby Bermuda options are well evaluated by means of a state-of-the-art Shannon wavelet inverse Fourier technique (SWIFT), which is a robust and highly efficient pricing method. Based on the SWIFT method, the price of American option can be approximated by using Richardson extrapolation schemes on a series of Bermudan options. Numerical experiments show that the proposed pricing method is efficient, especially for short-term American put options.