Joshi’s Split Tree for Option Pricing

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ID: 118670
2020
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Abstract
In a thorough study of binomial trees, Joshi introduced the split tree as a two-phase binomial tree designed to minimize oscillations, and demonstrated empirically its outstanding performance when applied to pricing American put options. Here we introduce a “flexible” version of Joshi’s tree, and develop the corresponding convergence theory in the European case: we find a closed form formula for the coefficients of 1/n and 1/n3/2 in the expansion of the error. Then we define several optimized versions of the tree, and find closed form formulae for the parameters of these optimal variants. In a numerical study, we found that in the American case, an optimized variant of the tree significantly improved the performance of Joshi’s original split tree.
Reference Key
hot2020risksjoshi’s Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Guillaume LeDuc,Merima Nurkanovic Hot;Guillaume LeDuc;Merima Nurkanovic Hot;
Journal risks
Year 2020
DOI
10.3390/risks8030081
URL
https://sciprofiles.com/publication/view/b9f8a828be805460cfc29326cd7ba6ff
Keywords
binomial option pricing error analysis for non-self-similar binomial trees american options black–scholes

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