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Convergence rates of recombining trees for pricing options on stocks under GBM and regime-switching models with known cash dividends

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  • Ma, Jingtang
  • Fan, Jiacheng

Abstract

In the literature there appear various kinds of binomial trees for pricing options on stocks under geometric Brownian motions (GBMs) with known cash dividends. The aim of this paper is to compare the performance of the existing binomial trees in aspect of the convergence rates, which are usually used to measure precisely how fast the approximate values converge to the exact one, and to give a theoretical proof of the convergence rates for the interpolation binomial trees which are based on a model that excludes the arbitrage possibilities. Also the paper extends the studies to the regime-switching models with known cash dividend payment.

Suggested Citation

  • Ma, Jingtang & Fan, Jiacheng, 2016. "Convergence rates of recombining trees for pricing options on stocks under GBM and regime-switching models with known cash dividends," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 128-147.
    • Handle: RePEc:eee:ecofin:v:37:y:2016:i:c:p:128-147
    DOI: 10.1016/j.najef.2016.03.011
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    References listed on IDEAS

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    1. Hu, May & Tuilautala, Mataiasi & Kang, Yuni, 2019. "Bandwagon effect: Special dividend payments," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 339-363.
    2. Ghafarian, Bahareh & Hanafizadeh, Payam & Qahi, Amir Hossein Mortazavi, 2018. "Applying Greek letters to robust option price modeling by binomial-tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 632-639.

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