IDEAS home Printed from https://ideas.repec.org/a/rsk/journ0/2160536.html
   My bibliography  Save this article

The GARCH option pricing model: a lattice approach

Author

Listed:
  • Nusret Cakici
  • Kudret Topyan

Abstract

ABSTRACT Building a recombining trinomial or multinomial tree under discrete-time generalized GARCH process is more difficult than one might have thought. Trinomial (or multinomial) trees are constructed to enable pricing of derivative securities under GARCH processes. The authors introduce important modifications to the method proposed by Ritchken and Trevor (1999). The algorithm is made more accurate by modifying the forward-building process and actually using interpolated variances only during the backward recursion process. This would yield a volatility pattern consistent with the true volatility process. The new algorithm, with its strong convergence properties, will compute the option prices very accurately. The modifications in this paper improve the model without making the algorithm less efficient.

Suggested Citation

  • Nusret Cakici & Kudret Topyan, . "The GARCH option pricing model: a lattice approach," Journal of Computational Finance, Journal of Computational Finance.
    • Handle: RePEc:rsk:journ0:2160536
    as

    Download full text from publisher

    File URL: https://www.risk.net/journal-of-computational-finance/2160536/the-garch-option-pricing-model-a-lattice-approach
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rsk:journ0:2160536. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Paine (email available below). General contact details of provider: https://www.risk.net/journal-of-computational-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.