Paper Info
Title
Connection Between Trinomial Trees And Finite Difference Methods For Option Pricing With State-Dependent Switching Rates
Abstract
Tree approaches (binomial or trinomial trees) are very popularly used in finance industry to price financial derivatives. Such popularity stems from their simplicity and clear financial interpretation of the methodology. On the other hand, PDE (partial differential equation) approaches, with which standard numerical procedures such as the finite difference method (FDM), are characterized with the wealth of existing theory, algorithms and numerical software that can be applied to solve the problem. For a simple geometric Brownian motion model, the connection between these two approaches is studied, but it is lower-order equivalence. Moreover such a connection for a regime-switching model is not so clear at all. This paper presents the high-order equivalence between the two for regime-switching models. Moreover the convergence rates of trinomial trees for pricing options with state-dependent switching rates are first proved using the theory of the FDMs.
Year
DOI
Venue
2018
10.1080/00207160.2017.1285021
INTERNATIONAL JOURNAL OF COMPUTER MATHEMATICS
Keywords
Field
DocType
Option pricing, trinomial tree methods, finite difference methods, regime-switching models
Binomial options pricing model,Mathematical optimization,Valuation of options,Finite difference methods for option pricing,Equivalence (measure theory),Partial differential equation,Trinomial tree,Mathematics,Geometric Brownian motion,Trinomial
Journal
Volume
Issue
ISSN
95
2
0020-7160
Citations 
PageRank 
References 
0
0.34
11
Authors
3
Name
Order
Citations
PageRank
Jingtang Ma112012.98
Hongji Tang200.34
Song-Ping Zhu34715.55