2014/10/22 by Hi Jun Choe, Choe, Hi Jun, Jeong Ho Chu +3
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Computational Finance (q-fin.CP) #FOS: Economics and business #FOS: Mathematics #Financial Risk and Volatility Modeling #Numerical Analysis (math.NA) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1410.5955
openalex publication_date 2014/10/22 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
The theme in this paper is the recombining binomial tree to price American put option when the underlying stock follows constant elasticity of variance(CEV) process. Recombining nodes of binomial tree are decided from finite difference scheme to emulate CEV process and the tree has a linear complexity. Also it is derived from the differential equation the asymptotic envelope of the boundary of tree. Conducting numerical experiments, we confirm the convergence and accuracy of the pricing by our recombining binomial tree method. As a result, we can compute the price of American put option under CEV model, effectively.