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    Joshi’s Split Tree for Option Pricing

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    Joshi’s Split Tree for Option Pricing.pdf (557.0Kb)
    Date
    2020
    Author
    Leduc, Guillaume
    Hot, Merima Nurkanovic
    Advisor(s)
    Unknown advisor
    Type
    Peer-Reviewed
    Article
    Published version
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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.
    DSpace URI
    http://hdl.handle.net/11073/21450
    External URI
    https://doi.org/10.3390/risks8030081
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