An adaptive averaging binomial method for option valuation

作者：Moo Kyoung Sook; Kim Hongjoong^*

来源：Operations Research Letters, 2013, 41(5): 511-515.

DOI：10.1016/j.orl.2013.06.008

• Option pricing
• Binomial methods
• Adaptive methods
• Local averaging

We introduce efficient accurate binomial methods for option pricing. The standard binomial approximation converges to continuous Black-Scholes values with the saw-tooth pattern in the error as the number of time steps increases. When we introduce local averages of payoffs at expiry, the saw-tooth pattern in the error has been reduced and the approximation becomes reliable. Furthermore, we employ adaptive meshes around non-smooth regions for efficiency. Numerical experiments illustrate that the proposed method gives more accurate values with less computational work compared to other methods.

• 出版日期2013-9