Option valuation by a self-exciting threshold binomial model

Fei Lung Yuen*, Tak Kuen Siu, Hailiang Yang

*Corresponding author for this work

Research output: Contribution to journalArticle

6 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 languageEnglish
Pages (from-to)28-37
Number of pages10
JournalMathematical and Computer Modelling
Volume58
Issue number1-2
DOIs
Publication statusPublished - Jul 2013

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