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Multinomial Lattices and Derivatives Pricing

In: Advances In Quantitative Analysis Of Finance And Accounting New Series

Author

Listed:
  • George M. Jabbour

    (The George Washington University, 2023 G Street, Room 530, Washington DC, 20052, USA)

  • Marat V. Kramin

    (Fannie Mae Portfolio Strategy Department, 2500 Wisconsin Avenue, #141, Washington DC, 20007, USA)

  • Timur V. Kramin

    (Tatarstan American Investment Fund, AK. Parina St., 12-62, Russia)

  • Stephen D. Young

    (Wachovia Securities Equity Derivatives Group, 5000 Morrowick Road, Charlotte, NC 28226, USA)

Abstract

This article elaborates an n-order multinomial lattice approach to value derivative instruments on asset prices characterized by a lognormal distribution. Nonlinear optimization is employed, specified moments are matched, and n-order multinomial trees are developed. The proposed methodology represents an alternative specification to models of jump processes of order greater than three developed by other researchers. The main contribution of this work is pedagogical. Its strength is in its straightforward explanation of the underlying tree building procedure for which numerical efficiency is a motivation for actual implementation.

Suggested Citation

  • George M. Jabbour & Marat V. Kramin & Timur V. Kramin & Stephen D. Young, 2004. "Multinomial Lattices and Derivatives Pricing," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting New Series, chapter 1, pages 1-15, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812565457_0001
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    Cited by:

    1. Yuan Hu & Abootaleb Shirvani & W. Brent Lindquist & Frank J. Fabozzi & Svetlozar T. Rachev, 2020. "Option Pricing Incorporating Factor Dynamics in Complete Markets," JRFM, MDPI, vol. 13(12), pages 1-33, December.
    2. Yuan Hu & Abootaleb Shirvani & W. Brent Lindquist & Frank J. Fabozzi & Svetlozar T. Rachev, 2020. "Option Pricing Incorporating Factor Dynamics in Complete Markets," Papers 2011.08343, arXiv.org.
    3. Yi-Ping Chang & Ming-Chin Hung & Yi-Chen Ko, 2011. "A multinomial tree model for pricing credit default swap options," Computational Statistics, Springer, vol. 26(1), pages 95-120, March.

    More about this item

    Keywords

    Discretionary Accruals; Futures Price Volatility; Bid-Ask Spread Components; CEO Compensation; Executive Cash Compensation; Convertible Debts; Environmental Liabilities;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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