Where can I find articles about time varying volatility binomial model?

Jennifer · October 19th, 2001, 12:35 am

Hi,I'm new to option pricing. I study binomial model with option pricing now and need to find some articles about time varying volatility binomial model. Does anyone have information about the sources?

reza · October 19th, 2001, 4:23 pm

I am sure there are many sources ... one is Neil Chriss's book "Black-Scholes and Beyond" ...

Mahoffer · October 20th, 2001, 4:24 am

Jennifer,Options Markets, J C Cox, M Rubinstein is also fine at explaining binomial models. The page by prof. rubistein (in-the-money.com) has all the rubisteins articles. The fellow, if i remember well, developed this approach.

Mic · October 20th, 2001, 10:10 pm

Got a side issue here. What are the advantages of binomial tree model over other approaches?Mic

reza · October 20th, 2001, 10:58 pm

Mic, depends what you mean by other approaches? there is so much to say, but here's a start:- closed form (Black Scholes) doesn't work for American Options- same comment for most monte-carlo's ...- trinomial tree doesn't allow to have 'market completeness' and replicate an option with stock and cash- explicit FD can be the same as binomial or trinomial depending on our parameter choices ...- implicit FD/Crank-Nicholson is more robust but slower and less intuitive to me, BT's most important advantage is the intuitive, simple and 'physical' interpretation

Mic · October 21st, 2001, 1:28 am

- closed form (Black Scholes) doesn't work for American Options >>Hi, but many closed-form results have been derived for American Options though they are approximations. So, by closed form, do you mean closed form EXACT results? And do you think the approximate closed-form results obtained so far are good enough or not?Mic

reza · October 21st, 2001, 11:32 am

Mic, I am aware some approximation formulae exist but not sure how good they are ...Collector is the our formulae specialist

pmb7 · November 8th, 2001, 7:34 pm

Jennifer,The book by Clewlow and Strickland, "Implementing DerivativesModels", discusses implementing a binomialtree with time varying volatility.Paul