Lean Trees - a General Approach for Improving Performance of Lattice Models for Option Pricing

Posted: 13 May 2004

See all articles by Rainer Baule

Rainer Baule

University of Hagen

Marco Wilkens

University of Augsburg

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Abstract

The well-known binomial and trinomial tree models for option pricing are examined from the point of view of numerical efficiency. Common lattices use a large part of time resources for calculations which are almost irrelevant for the solution. To avoid this waste of resources, the tree is reduced to a 'lean' form which yields the same order of convergence, but with a reduction of numerical effort. In numerical tests it is shown that the proposed method leads to a significant improvement in real calculation time without loss of accuracy for a broad class of derivatives.

Keywords: Lean trees, lattice models, option pricing, numerical valuation techniques

JEL Classification: G13, C63

Suggested Citation

Baule, Rainer and Wilkens, Marco, Lean Trees - a General Approach for Improving Performance of Lattice Models for Option Pricing. Review of Derivatives Research Vol. 7, pp. 53-72, 2004. Available at SSRN: https://ssrn.com/abstract=545282

Rainer Baule (Contact Author)

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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