Convergence of binomial tree methods for European/American path-dependent options

Lishang Jiang; Min Dai

doi:10.1137/S0036142902414220

Convergence of binomial tree methods for European/American path-dependent options

Lishang Jiang, Min Dai

Research output: Journal article publication › Journal article › Academic research › peer-review

54 Citations (Scopus)

Abstract

The binomial tree method, first proposed by Cox, Ross, and Rubinstein [Journal of Financial Economics, 7 (1979), pp. 229-263], is one of the most popular approaches to pricing options. By introducing an additional path-dependent variable, such methods can be readily extended to the valuation of path-dependent options. In this paper, using numerical analysis and the notion of viscosity solutions, we present a unifying theoretical framework to show the uniform convergence of binomial tree methods for European/American path-dependent options, including arithmetic average options, geometric average options, and lookback options.

Original language	English
Pages (from-to)	1094-1109
Number of pages	16
Journal	SIAM Journal on Numerical Analysis
Volume	42
Issue number	3
DOIs	https://doi.org/10.1137/S0036142902414220
Publication status	Published - Jul 2004
Externally published	Yes

Keywords

Binomial tree method
Convergence
European/American path-dependent options

ASJC Scopus subject areas

Numerical Analysis
Computational Mathematics
Applied Mathematics

More information

10.1137/S0036142902414220

Cite this

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Convergence of binomial tree methods for European/American path-dependent options

Abstract

Keywords

ASJC Scopus subject areas

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