Convergence Analysis of Binomial Tree Method for American-Type Path-Dependent Options
FREE BOUNDARY PROBLEMS: THEORY AND APPLICATIONS, pp. 153-166, Chiba, 1999
14 Pages Posted: 4 May 2006 Last revised: 9 Feb 2009
Date Written: December 1, 2002
The pricing models of American-type path-dependent options are of degenerate parabolic obstacle problems. The binomial tree method is the most popular approach to pricing options. For some special cases, this method is modified in order to make it feasible. The main purpose of this paper is, using numerical analysis and the notion of viscosity solutions, to show the uniform convergence of the binomial tree method and the modified binomial tree method for American-type path-dependent options.
Numerical experiments are given to demonstrate our conclusion.
Keywords: Path-dependent options, binomial tree method, forward shooting grid method, convergence analysis
JEL Classification: G13
Suggested Citation: Suggested Citation