Convergence rates of recombining trees for pricing options on stocks under GBM and regime-switching models with known cash dividends

Jingtang Ma and Jiacheng Fan

The North American Journal of Economics and Finance, 2016, vol. 37, issue C, 128-147

Abstract: In the literature there appear various kinds of binomial trees for pricing options on stocks under geometric Brownian motions (GBMs) with known cash dividends. The aim of this paper is to compare the performance of the existing binomial trees in aspect of the convergence rates, which are usually used to measure precisely how fast the approximate values converge to the exact one, and to give a theoretical proof of the convergence rates for the interpolation binomial trees which are based on a model that excludes the arbitrage possibilities. Also the paper extends the studies to the regime-switching models with known cash dividend payment.

Keywords: Option pricing; Known cash dividends; Binomial trees; Convergence rates; Regime-switching models (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:37:y:2016:i:c:p:128-147

DOI: 10.1016/j.najef.2016.03.011

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