The accuracy and efficiency of alternative option pricing approaches relative to a log-transformed trinomial model
✍ Scribed by Hsuan-Chi Chen; David M. Chen; San-Lin Chung
- Publisher
- John Wiley and Sons
- Year
- 2002
- Tongue
- English
- Weight
- 141 KB
- Volume
- 22
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Abstract
This article presents a log‐transformed trinomial approach to option pricing and finds that various
numerical procedures in the option pricing literature are embedded in this approach with choices of different
parameters. The unified view also facilitates comparisons of computational efficiency among numerous lattice
approaches and explicit finite difference methods. We use the root‐mean‐squared relative error and
the minimum convergence step to evaluate the accuracy and efficiency for alternative option pricing approaches.
The numerical results show that the equal‐probability trinomial specification of He (12) and Tian (25) and the sharpened trinomial
specification of Omberg (21) outperform other lattice approaches and explicit
finite difference methods. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:557–577, 2002