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A Lattice Framework with Smooth Convergence for Pricing Real Estate Derivatives with Stochastic Interest Rate

A Lattice Framework with Smooth Convergence for Pricing Real Estate Derivatives with Stochastic... In this paper, a general binomial lattice framework, which is both computationally simple and numerically accurate, is developed for pricing real estate derivatives with stochastic interest rate. To obtain a computationally simple binomial tree with constant volatility, the transformation method and the probability density matching approach are introduced. A tilt parameter is then added to the jump movements to obtain smooth convergence. Therefore, the Richardson extrapolation (RE) can be used to enhance the convergence of the discrete binomial lattice models to continuous models when pricing European options. In addition, our smooth convergent models can also be applied to pricing American options. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

A Lattice Framework with Smooth Convergence for Pricing Real Estate Derivatives with Stochastic Interest Rate

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References (31)

Publisher
Springer Journals
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
DOI
10.1007/s11146-016-9576-x
Publisher site
See Article on Publisher Site

Abstract

In this paper, a general binomial lattice framework, which is both computationally simple and numerically accurate, is developed for pricing real estate derivatives with stochastic interest rate. To obtain a computationally simple binomial tree with constant volatility, the transformation method and the probability density matching approach are introduced. A tilt parameter is then added to the jump movements to obtain smooth convergence. Therefore, the Richardson extrapolation (RE) can be used to enhance the convergence of the discrete binomial lattice models to continuous models when pricing European options. In addition, our smooth convergent models can also be applied to pricing American options.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Sep 3, 2016

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