The GARCH Option Pricing Model: A Modification of Lattice Approach |
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Authors: | Chun-Chou Wu |
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Institution: | (1) Department of International Trade, Chung Yuan University, Chung-Li, Taiwan |
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Abstract: | Ritchken and Trevor (1999) proposed a lattice approach for pricing American options under discrete time-varying volatility
GARCH frameworks. Even though the lattice approach worked well for the pricing of the GARCH options, it was inappropriate
when the option price was computed on the lattice using standard backward recursive procedures, even if the concepts of Cakici
and Topyan (2000) were incorporated. This paper shows how to correct the deficiency and that with our adjustment, the lattice
method performs properly for option pricing under the GARCH process.
JEL Classification: C10, C32, C51, F37, G12 |
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Keywords: | Garch American options lattice algorithm trinomial trees |
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