Option valuation by a self-exciting threshold binomial model

Fei Lung Yuen; Tak Kuen Siu; Hailiang Yang

doi:10.1016/j.mcm.2012.07.014

Option valuation by a self-exciting threshold binomial model

Fei Lung Yuen, Tak Kuen Siu, Hailiang Yang

Research output: Contribution to journal › Article › peer-review

9 Citations (Scopus)

Abstract

This paper introduces a discrete-time self-exciting threshold binomial model to price derivative securities. The key idea is to incorporate the regime switching effect in a discrete-time binomial model for an asset’s prices via the “self-exciting” threshold principle. The proposed model provides a simple structure for pricing options in a changing economic environment. Numerical examples for the proposed threshold binomial model as well as their trinomial extension are given.

Original language	English
Pages (from-to)	28–37
Journal	MATHEMATICAL AND COMPUTER MODELLING
Volume	58
Early online date	25 Jul 2012
DOIs	https://doi.org/10.1016/j.mcm.2012.07.014
Publication status	Published - 2013

Keywords

Option valuation
Threshold principle
Self-exciting
Binomial models
Trinomial extensions
Regime switching

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10.1016/j.mcm.2012.07.014

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title = "Option valuation by a self-exciting threshold binomial model",

abstract = "This paper introduces a discrete-time self-exciting threshold binomial model to price derivative securities. The key idea is to incorporate the regime switching effect in a discrete-time binomial model for an asset{\textquoteright}s prices via the “self-exciting” threshold principle. The proposed model provides a simple structure for pricing options in a changing economic environment. Numerical examples for the proposed threshold binomial model as well as their trinomial extension are given.",

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AB - This paper introduces a discrete-time self-exciting threshold binomial model to price derivative securities. The key idea is to incorporate the regime switching effect in a discrete-time binomial model for an asset’s prices via the “self-exciting” threshold principle. The proposed model provides a simple structure for pricing options in a changing economic environment. Numerical examples for the proposed threshold binomial model as well as their trinomial extension are given.

KW - Option valuation

KW - Threshold principle

KW - Self-exciting

KW - Binomial models

KW - Trinomial extensions

KW - Regime switching

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DO - 10.1016/j.mcm.2012.07.014

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JO - MATHEMATICAL AND COMPUTER MODELLING

JF - MATHEMATICAL AND COMPUTER MODELLING

ER -

Option valuation by a self-exciting threshold binomial model

Abstract

Keywords

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