A Model-Free Lattice

Ren-Raw Chen (), Pei-Lin Hsieh, Jeffrey Huang and Hongbiao Zhao
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Ren-Raw Chen: Gabelli School of Business, Fordham University, New York, NY 10019, USA
Pei-Lin Hsieh: Department of Finance, National Cheng-Chi University, Taipei City 11605, Taiwan
Jeffrey Huang: FICC, SinoPack Bank, Taipei 104, Taiwan
Hongbiao Zhao: School of Statistics and Management, Shanghai University of Finance and Economics (SUFE), Shanghai 200433, China

JRFM, 2025, vol. 18, issue 1, 1-19

Abstract: Predicting future price movements has always been one of the major topics in financial research, and there is no better method to predict the future prices of an asset than using its derivatives. In this paper, we propose a model-free lattice model that describes the complete price evolution of the underlying asset and simultaneously re-prices all of its European options. Given that such a lattice is consistent with market option prices, it must embed all necessary risk factors (e.g., random volatility, random interest rates, and jumps) and market restrictions (e.g., mean-reversion and liquidity) that are priced into the European options.

Keywords: lattice; copula; stochastic process; price evolution (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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