The convergence of binomial trees for pricing the American put

Mark S. Joshi

Journal of Risk

Abstract: ABSTRACT We study 20 different implementation methodologies for each of 11 different choices of parameters of binomial trees and investigate the speed of convergence for pricing American put options numerically. We conclude that the most effective methods involve using truncation, Richardson extrapolation and sometimes smoothing.We do not recommend the use of a European as a control. The most effective trees are the Tian third-order moment matching tree and a new tree designed to minimize oscillations.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-risk/2161056/converge ... pricing-american-put (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ4:2161056

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine ().