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Bivariate Binomial Options Pricing with Generalized Interest Rate Processes

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Author Info

  • Hilliard, Jimmy E
  • Schwartz, Adam L
  • Tucker, Alan L
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    Abstract

    We extend existing pricing models and develop a bivariate binomial option pricing technique that accommodates correlated state variables. This technique offers the ability to price American-style options, thereby accommodating early exercise, despite the existence of two correlated underlying state variables. Our technique is computationally efficient and can be further generalized for multiple-state variables, albeit with an accompanying rise in computational expense.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 19 (1996)
    Issue (Month): 4 (Winter)
    Pages: 585-602

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    Handle: RePEc:bla:jfnres:v:19:y:1996:i:4:p:585-602

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0270-2592
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    Web page: http://www.southwesternfinance.org/
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    Web: http://www.blackwellpublishing.com/subs.asp?ref=0270-2592

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    Cited by:
    1. Chuang-Chang Chang & Jun-Biao Lin, 2010. "The valuation of multivariate contingent claims under transformed trinomial approaches," Review of Quantitative Finance and Accounting, Springer, vol. 34(1), pages 23-36, January.
    2. Buttimer, Richard Jr. & Lin, Che-Chun, 2005. "Valuing US and Canadian mortgage servicing rights with default and prepayment," Journal of Housing Economics, Elsevier, vol. 14(3), pages 194-211, September.
    3. Elisa Appolloni & Lucia Caramellino & Antonino Zanette, 2013. "A robust tree method for pricing American options with CIR stochastic interest rate," Papers 1305.0479, arXiv.org.
    4. Chuang-Chang Chang & Jun-Biao Lin & Wei-Che Tsai & Yaw-Huei Wang, 2012. "Using Richardson extrapolation techniques to price American options with alternative stochastic processes," Review of Quantitative Finance and Accounting, Springer, vol. 39(3), pages 383-406, October.
    5. Acharya, Viral V & Carpenter, Jennifer, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," CEPR Discussion Papers 3328, C.E.P.R. Discussion Papers.

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