Premium
On the errors and comparison of Vega estimation methods
Author(s) -
Chung SanLin,
Shackleton Mark
Publication year - 2005
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20127
Subject(s) - vega , volatility (finance) , econometrics , discretization , mathematics , computer science , mathematical analysis , physics , astronomy
This article discusses convergence problems when calculating Vega (option sensitivity to volatility) that arise from discretization errors embedded in the lattice approach. Four alternative improvements to the traditional binomial method are discussed and investigated for performance. We also propose a new Modified Binomial (MB) Method to calculate Vegas. Numerical results show that although the MB is not the most price accurate of the models, due to its error structure as a function of volatility, it produces the most accurate and fastest Vega estimates. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:21–38, 2005