IDEAS home Printed from
   My bibliography  Save this paper

Approximating stochastic volatility by recombinant trees


  •{c} Aky{i}ld{i}r{i}m
  • Yan Dolinsky
  • H. Mete Soner


A general method to construct recombinant tree approximations for stochastic volatility models is developed and applied to the Heston model for stock price dynamics. In this application, the resulting approximation is a four tuple Markov process. The first two components are related to the stock and volatility processes and take values in a two-dimensional binomial tree. The other two components of the Markov process are the increments of random walks with simple values in $\{-1,+1\}$. The resulting efficient option pricing equations are numerically implemented for general American and European options including the standard put and calls, barrier, lookback and Asian-type pay-offs. The weak and extended weak convergences are also proved.

Suggested Citation

  •{c} Aky{i}ld{i}r{i}m & Yan Dolinsky & H. Mete Soner, 2012. "Approximating stochastic volatility by recombinant trees," Papers 1205.3555,, revised Jul 2014.
  • Handle: RePEc:arx:papers:1205.3555

    Download full text from publisher

    File URL:
    File Function: Latest version
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Leippold, Markus & Schärer, Steven, 2017. "Discrete-time option pricing with stochastic liquidity," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 1-16.
    2. Nikolai Dokuchaev, 2015. "On statistical indistinguishability of complete and incomplete discrete time market models," Papers 1505.00638,

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1205.3555. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.