Joshi's split tree for option pricing

Artikel

In a thorough study of binomial trees, Joshi introduced the split tree as a two-phase binomial tree designed to minimize oscillations, and demonstrated empirically its outstanding performance when applied to pricing American put options. Here we introduce a "flexible" version of Joshi's tree, and develop the corresponding convergence theory in the European case: we find a closed form formula for the coefficients of 1/n and 1/n3/2 in the expansion of the error. Then we define several optimized versions of the tree, and find closed form formulae for the parameters of these optimal variants. In a numerical study, we found that in the American case, an optimized variant of the tree significantly improved the performance of Joshi's original split tree.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Risks ; ISSN: 2227-9091 ; Volume: 8 ; Year: 2020 ; Issue: 3 ; Pages: 1-26 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft
• Subject: binomial option pricing ; error analysis for non-self-similar binomial trees ; American options ; Black-Scholes

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Leduc, Guillaume ; Hot, Merima Nurkanovic
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2020

Further information

• DOI: doi:10.3390/risks8030081
• Handle: http://hdl.handle.net/10419/258034
• Last update: 10.03.2025, 11:43 AM CET