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The GARCH Option Pricing Model: A Modification of Lattice Approach


  • Chun-Chou Wu



Ritchken and Trevor (1999) proposed a lattice approach for pricing American options under discrete time-varying volatility GARCH frameworks. Even though the lattice approach worked well for the pricing of the GARCH options, it was inappropriate when the option price was computed on the lattice using standard backward recursive procedures, even if the concepts of Cakici and Topyan (2000) were incorporated. This paper shows how to correct the deficiency and that with our adjustment, the lattice method performs properly for option pricing under the GARCH process. Copyright Springer Science + Business Media, Inc. 2006

Suggested Citation

  • Chun-Chou Wu, 2006. "The GARCH Option Pricing Model: A Modification of Lattice Approach," Review of Quantitative Finance and Accounting, Springer, vol. 26(1), pages 55-66, February.
  • Handle: RePEc:kap:rqfnac:v:26:y:2006:i:1:p:55-66
    DOI: 10.1007/s11156-006-7033-2

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    Cited by:

    1. In Kim & In-Seok Baek & Jaesun Noh & Sol Kim, 2007. "The role of stochastic volatility and return jumps: reproducing volatility and higher moments in the KOSPI 200 returns dynamics," Review of Quantitative Finance and Accounting, Springer, vol. 29(1), pages 69-110, July.
    2. Konstantinos Skindilias & Chia Lo, 2015. "Local volatility calibration during turbulent periods," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 425-444, April.
    3. Ma, Jingtang & Li, Wenyuan & Han, Xu, 2015. "Stochastic lattice models for valuation of volatility options," Economic Modelling, Elsevier, vol. 47(C), pages 93-104.
    4. Cheng-Few Lee & Yibing Chen & John Lee, 2016. "Alternative methods to derive option pricing models: review and comparison," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 417-451, August.


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