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Recombining Binomial Trees
Hello all. Can anyone provide a reference to a book/paper (as introductory as possibe) that discusses the implementation of a recombining binomial tree for equity option valuation in which volatility is time-dependent? Anything with examples would be even more beneficial. Thank you and best regards.
Recombining Binomial Trees
You probably want to be looking at 'local volatility' models, where the volatiloity is a function of strike and/or time. Do a search on that here. Also the papers of Dupire, Derman and coauthors, a paper of Rubinstein. Derman et al's papers are quite nice to implement; mostly published in Risk mag in the old days, but the original Goldman Sachs versions are all at his website www.ederman.com There is also some stuff on this in Espen Haug's book, certainly not the most general models, but nice enough to get you started.
Recombining Binomial Trees
Have a look at this:Generalized Diffusion TreeIt describes a very general method and contains lots of references to similar papers. I haven't published it in a refereed journal yet as there are some changes I would like to make and I haven't had time, but if anyone has any comments to make, I'd love to see them.
Recombining Binomial Trees
Thank you both very much for the help!One last question ... any good resources for numercial techniques for efficiently computing non-recombining trees?Thanks again and best regards.
Recombining Binomial Trees
QuoteOriginally posted by: huntingThank you both very much for the help!One last question ... any good resources for numercial techniques for efficiently computing non-recombining trees?Thanks again and best regards.Hunting,I am not aware of special numerical techniques for this purpose , only heard that an assumption is made on seperability of volatility structure. For an example, I would look at LRS lattice for implementing HJM dynamics.Please do tell me if you find other techniques.Hope I could help,Asd
Recombining Binomial Trees
Originally posted by: huntingOne last question ... any good resources for numercial techniques for efficiently computing non-recombining trees?My paper has some suggestions for dealing with situations where recombination does not occur.