Smooth Convergence in Binomial Tree
Date Issued
2008
Date
2008
Author(s)
Huang, Syuan-Ren
Abstract
The products of derivative develop rapidly in recent years. There are many methods to price derivatives includingsing binomial tree, partial differential equations, martingale methods, and Monte Carlo simulation, etc.n these methods, binomial tree model is the simplest method that is used widely. The binomial model of Cox, Ross, and Rubinstein, CRR model, is well known.ut CRR model converge to correct option price oscillatory and non-monotonic.ome models use a "tilt" parameter that alters the shape and span of the binomial tree to improve the behavior of convergence.n these models, Tian''s flexible model, Widdicks, Andricopoulos, Newton, and Duck''s WAND model, Joshi''s model, and Chang and Palmer''s center binomial model are significant.n this article, we use the main theorem of Chang-Palmer to prove the convergence rate that is not unspecitied in their paper of WAND model, and we use some relation to estimate the implied n of WAND model to save the computation of using Newton-Raphson iteration.inally, we compared with the numerical results of these models.
Subjects
binomial model
smooth convergence
WAND model
Type
thesis
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