Trinomial Tree Option Pricing via Threshold-garch Model
نویسنده
چکیده
In this paper, trinomial tree option pricing algorithms for Threshold-GARCH model are presented. The ThresholdGARCH pricing structure provides a more sophisticated description for the changing of conditional variances. To apply the Threshold-GARCH model to evaluate various types of options, convenient and efficient computation algorithms are urgently needed. A simple computational method, called the “Median” algorithm is proposed; moreover, extensions of the interpolating methods proposed by Ritchken & Trevor and Cakici & Topyan are discussed. The numerical results show that the proposed “Median” method is not only accurate, but also offers a significant reduction in computing-time.
منابع مشابه
On Accurate Trinomial GARCH Option Pricing Algorithms
The GARCH model has been successful in describing the volatility dynamics of asset return series. However, tree-based GARCH option pricing algorithms suffer from exponential running time, inaccuracy, or other problems. Lyuu and Wu proved that the trinomial-tree option pricing algorithms of Ritchken and Trevor (1999) and Cakici and Topyan (2000) explode exponentially when the number of partition...
متن کاملThe Bino-trinomial Tree: A Simple Model for Efficient and Accurate Option Pricing
Most derivatives do not have simple valuation formulas and must be priced by numerical methods such as tree models. Although the option prices computed by a tree model converges to the theoretical value as the number of time steps increases, the distribution error and the nonlinearity error may make the prices converge slowly or even oscillate significantly. This paper introduces a novel tree m...
متن کاملDiscrete time option pricing with flexible volatility estimation
By extending the GARCH option pricing model of Duan (1995) to more exible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage eeect, simulated...
متن کاملThe Bino-trinomial Tree: a Simple Model for Efficient and Accurate Option Pricing
Most derivatives do not have simple valuation formulas and must be priced by numerical methods. However, the distribution error and the nonlinearity error introduced by many numerical methods make the pricing results converge slowly or even oscillate significantly. This paper introduces a novel tree model, the bino-trinomial tree (BTT) model, for pricing a wide range of derivatives. The BTT red...
متن کاملLean Trees—A General Approach for Improving Performance of Lattice Models for Option Pricing
The well-known binomial and trinomial tree models for option pricing are examined from the point of view of numerical efficiency. Common lattices use a large part of time resources for calculations which are almost irrelevant for the solution. To avoid this waste of resources, the tree is reduced to a “lean” form which yields the same order of convergence, but with a reduction of numerical effo...
متن کامل