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Constructing Trinominal Models Based on Cubature Method on Wiener Space: Applications to Pricing Financial Derivatives
2024 (engelsk)Inngår i: Data Analysis and Related Applications 3: Theory and Practice – New Approaches / [ed] Yiannis Dimotikalis, Christos H. Skiadas, John Wiley & Sons, 2024, s. 109-130Kapittel i bok, del av antologi (Fagfellevurdert)
Abstract [en]

This chapter deals with an extension to the developed novel cubature methods of degrees 5 on Wiener space. It examines cubature formulae that are exact for all multiple Stratonovich integrals up to dimension equal to the degree. Cubature method reduces solving a stochastic differential equation to solving a finite set of ordinary differential equations. The chapter aims to compare the numerical solutions with the Black's and Black–Scholes models' analytical solutions. It examines the convergence of the sequences of constructed trinomial model to a geometric Brownian motion. The chapter also examines the conditions that make the probability measure in our trinomial model a martingale measure, i.e. risk-neutral probability measure. The constructed model has practical usage in pricing American options and American-style derivatives. The chapter emphasizes that the constructed trinomial tree has practical usage and applications in pricing path-dependent and American-style options.

sted, utgiver, år, opplag, sider
John Wiley & Sons, 2024. s. 109-130
Serie
Big Data, Artificial Intelligence and Data Analysis SET
Emneord [en]
Black–Scholes models, Cubature method, pricing American options, risk-neutral probability measure, trinomial model, Wiener space
HSV kategori
Identifikatorer
URN: urn:nbn:se:liu:diva-203078DOI: 10.1002/9781394284061.ch9ISBN: 9781786309624 (tryckt)ISBN: 9781394284054 (digital)OAI: oai:DiVA.org:liu-203078DiVA, id: diva2:1854852
Tilgjengelig fra: 2024-04-29 Laget: 2024-04-29 Sist oppdatert: 2024-10-28bibliografisk kontrollert

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Nohrouzian, Hossein

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Nohrouzian, HosseinMalyarenko, AnatoliyNi, Ying

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