On Accurate Trinomial GARCH Option Pricing Algorithms
Date Issued
2005
Date
2005
Author(s)
Liu, Chun-Yang
DOI
en-US
Abstract
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 partitions per day, n, exceeds a threshold determined by the GARCH parameters. The improved algorithm of Lyuu and Wu (2003) still contains some problems. For example, the option prices suffer a trend to deviate from true values as n increases. This thesis proposes a new methodology to further improve the Lyuu-Wu algorithm by addressing this problem. We will confirm our algorithm's efficiency and accuracy with numerical experiments.
Subjects
GARCH模型
三元樹
選擇權評價
三元內插法
GARCH model
trinomial tree
option pricing
cubic interpolation
Type
thesis
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