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A Unified Tree approach for options pricing under stochastic volatility models

Author

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  • Lo, C.C.
  • Nguyen, D.
  • Skindilias, K.

Abstract

We develop a simple and efficient tree approach for pricing options under stochastic volatility. Our method encompasses the models of Heston, Hull-White, Stein-Stein, α-Hypergeometric, 3/2 and 4/2 models. Numerical results are provided to illustrate the effectiveness of the proposed method.

Suggested Citation

  • Lo, C.C. & Nguyen, D. & Skindilias, K., 2017. "A Unified Tree approach for options pricing under stochastic volatility models," Finance Research Letters, Elsevier, vol. 20(C), pages 260-268.
    • Handle: RePEc:eee:finlet:v:20:y:2017:i:c:p:260-268
    DOI: 10.1016/j.frl.2016.10.009
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    References listed on IDEAS

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    1. Carl Chiarella & Boda Kang & Gunter H. Meyer & Andrew Ziogas, 2009. "The Evaluation Of American Option Prices Under Stochastic Volatility And Jump-Diffusion Dynamics Using The Method Of Lines," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(03), pages 393-425.
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    Cited by:

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    2. Weilong Fu & Ali Hirsa, 2022. "Solving barrier options under stochastic volatility using deep learning," Papers 2207.00524, arXiv.org.
    3. Zhe Zhao & Zhenyu Cui & Ionuţ Florescu, 2018. "VIX derivatives valuation and estimation based on closed-form series expansions," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-18, June.
    4. Duy Nguyen, 2018. "A hybrid Markov chain-tree valuation framework for stochastic volatility jump diffusion models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-30, December.
    5. Jang, Bong-Gyu & Tae, Hyeon-Wuk, 2018. "Option pricing under regime switching: Integration over simplexes method," Finance Research Letters, Elsevier, vol. 24(C), pages 301-312.
    6. Kirkby, J. Lars, 2023. "Hybrid equity swap, cap, and floor pricing under stochastic interest by Markov chain approximation," European Journal of Operational Research, Elsevier, vol. 305(2), pages 961-978.
    7. Maya Briani & Lucia Caramellino & Giulia Terenzi & Antonino Zanette, 2019. "Numerical Stability Of A Hybrid Method For Pricing Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(07), pages 1-46, November.

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