The GARCH Option Pricing Model: A Modification of Lattice Approach

The GARCH Option Pricing Model: A Modification of Lattice Approach 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The GARCH Option Pricing Model: A Modification of Lattice Approach

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2006 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-006-7033-2
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2006

References

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