Approximating stochastic volatility by recombinant trees
From MaRDI portal
Abstract: A general method to construct recombinant tree approximations for stochastic volatility models is developed and applied to the Heston model for stock price dynamics. In this application, the resulting approximation is a four tuple Markov process. The first two components are related to the stock and volatility processes and take values in a two-dimensional binomial tree. The other two components of the Markov process are the increments of random walks with simple values in . The resulting efficient option pricing equations are numerically implemented for general American and European options including the standard put and calls, barrier, lookback and Asian-type pay-offs. The weak and extended weak convergences are also proved.
Recommendations
- A tree-based method to price American options in the Heston model
- A new simple tree approach for the Heston's stochastic volatility model
- Stochastic Volatility: Option Pricing using a Multinomial Recombining Tree
- Regime-switching recombining tree for option pricing
- Recombining Binomial Tree Approximations for Diffusions
Cites work
- scientific article; zbMATH DE number 5016447 (Why is no real title available?)
- scientific article; zbMATH DE number 3951715 (Why is no real title available?)
- scientific article; zbMATH DE number 1354815 (Why is no real title available?)
- A Diffusion Limit for Generalized Correlated Random Walks
- A closed-form solution for options with stochastic volatility with applications to bond and currency options
- A theory of the term structure of interest rates
- ARCH models as diffusion approximations
- American options under stochastic volatility
- Augmented GARCH\((p,q)\) process and its diffusion limit
- Duality and convergence for binomial markets with friction
- Efficient numerical methods for pricing American options under stochastic volatility
- Functional quantization for numerics with an application to option pricing
- Limit theorem on option replication cost with transaction costs
- Option pricing: A simplified approach
- Pricing of geometric Asian options under Heston's stochastic volatility model
- Stock price distributions with stochastic volatility: an analytic approach
- THE GARCH OPTION PRICING MODEL
- The pricing of options and corporate liabilities
Cited in
(16)- Lattice methods for pricing American strangles with two-dimensional stochastic volatility models
- Numerical stability of a hybrid method for pricing options
- Functional central limit theorems for rough volatility
- Recombining Binomial Tree Approximations for Diffusions
- Recombined multinomial tree based on saddle-point approximation and its application to Lévy models options pricing
- Markov chain approximation and measure change for time-inhomogeneous stochastic processes
- Training trees on tails with applications to portfolio choice
- Derivative evaluation using recombining trees under stochastic volatility
- A tree-based method to price American options in the Heston model
- On strong causal binomial approximation for stochastic processes
- On statistical indistinguishability of complete and incomplete discrete time market models
- General lattice methods for arithmetic Asian options
- Stochastic Volatility: Option Pricing using a Multinomial Recombining Tree
- Pricing and exercising American options: an asymptotic expansion approach
- Convergence rate of Markov chains and hybrid numerical schemes to jump-diffusion with application to the Bates model
- A new simple tree approach for the Heston's stochastic volatility model
This page was built for publication: Approximating stochastic volatility by recombinant trees
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q744390)
