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Trinomial or binomial: Accelerating American put option price on trees

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  • Jiun Hong Chan
  • Mark Joshi
  • Robert Tang
  • Chao Yang

Abstract

We investigate the pricing performance of eight trinomial trees and one binomial tree, which was found to be most effective in an earlier study, under 20 different implementation methodologies for pricing American put options. We conclude that the binomial tree, the Tian third‐order moment‐matching tree with truncation, Richardson extrapolation, and smoothing, performs better than the trinomial trees. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:826–839, 2009

Suggested Citation

  • Jiun Hong Chan & Mark Joshi & Robert Tang & Chao Yang, 2009. "Trinomial or binomial: Accelerating American put option price on trees," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(9), pages 826-839, September.
    • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:9:p:826-839
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    Cited by:

    1. Ting Chen & Mark Joshi, 2012. "Truncation and acceleration of the Tian tree for the pricing of American put options," Quantitative Finance, Taylor & Francis Journals, vol. 12(11), pages 1695-1708, November.
    2. Jin, Xing & Li, Xun & Tan, Hwee Huat & Wu, Zhenyu, 2013. "A computationally efficient state-space partitioning approach to pricing high-dimensional American options via dimension reduction," European Journal of Operational Research, Elsevier, vol. 231(2), pages 362-370.
    3. Guillaume Leduc & Merima Nurkanovic Hot, 2020. "Joshi’s Split Tree for Option Pricing," Risks, MDPI, vol. 8(3), pages 1-26, August.
    4. J. X. Jiang & R. H. Liu & D. Nguyen, 2016. "A Recombining Tree Method For Option Pricing With State-Dependent Switching Rates," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-26, March.
    5. Dasheng Ji & B. Brorsen, 2011. "A recombining lattice option pricing model that relaxes the assumption of lognormality," Review of Derivatives Research, Springer, vol. 14(3), pages 349-367, October.
    6. Luca Vincenzo Ballestra, 2021. "Enhancing finite difference approximations for double barrier options: mesh optimization and repeated Richardson extrapolation," Computational Management Science, Springer, vol. 18(2), pages 239-263, June.

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