On Bivariate Lattices for Option Pricing under Stochastic Volatility Models

• Main Authors: Chia-Ting Huang, 黃佳婷
• Other Authors: 呂育道
• Format: Others
• Language: zh-TW
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/71189564722535471380

碩士 === 臺灣大學 === 資訊工程學研究所 === 98 === The bivariate binomial framework of Hilliard and Schwartz (1996) allows non-zero correlation between the stochastic volatility and the underlying process. It can also be used to value American options. This thesis points out the problems with their bivariate binomial model. It also provides a partial solution to deal with those problems. When pricing options with the Hilliard-Schwartz model, it is easy to demonstrate that incorrect probabilities will occur in some situations. We use the mean-tracking method to construct trinomial trees instead of binomial trees for one dimension. Nevertheless, the stochastic volatility dimension still adopts the binomial tree as Hilliard and Schwartz (1996). The framework will be called the bivariate bino-trinomial model, and it is used to evaluate options.