Trinomial or Binomial: Accelerating American Put Option Price on Trees

18 Pages Posted: 2 Sep 2008  

Jiun Hong Chan

University of Melbourne - Centre for Actuarial Studies

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies

Robert Tang

University of Melbourne - Centre for Actuarial Studies

Chao Yang

AMP Financial Services

Date Written: September 1, 2008

Abstract

We investigate the pricing performance of eight trinomial trees and one binomial tree, which was found to be most effective in an earlier paper, under twenty different implementation methodologies for pricing American put options. We conclude that the binomial tree, the Tian third order moment matching tree with truncation, Richardson extrapolation and smoothing performs better than the trinomial trees.

Keywords: binomial tree, trinomial tree, American put option, speed

JEL Classification: G13

Suggested Citation

Chan, Jiun Hong and Joshi, Mark S. and Tang, Robert and Yang, Chao, Trinomial or Binomial: Accelerating American Put Option Price on Trees (September 1, 2008). Available at SSRN: https://ssrn.com/abstract=1261745 or http://dx.doi.org/10.2139/ssrn.1261745

Jiun Hong Chan

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Robert Tang

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Chao Yang

AMP Financial Services ( email )

Sydney
Australia

Paper statistics

Downloads
1,769
Rank
6,780
Abstract Views
5,217