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BIVARIATE BINOMIAL OPTIONS PRICING WITH GENERALIZED INTEREST RATE PROCESSES
Author(s) -
Hilliard Jimmy E.,
Schwartz Adam L.,
Tucker Alan L.
Publication year - 1996
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1996.tb00232.x
Subject(s) - binomial options pricing model , bivariate analysis , binomial (polynomial) , econometrics , trinomial tree , valuation of options , state variable , mathematics , economics , statistics , physics , thermodynamics
We extend existing pricing models and develop a bivariate binomial option pricing technique that accommodates correlated state variables. This technique offers the ability to price American‐style options, thereby accommodating early exercise, despite the existence of two correlated underlying state variables. Our technique is computationally efficient and can be further generalized for multiple‐state variables, albeit with an accompanying rise in computational expense.