Computational Finance Seminar

Purdue Computational Finance Program

A Binomial Tree Approach to Stochastic Volatility Driven Model of the Stock Price

April 23, 2004
1:30 p.m.

BRNG 1245

Mr. Ionut Florescu, Ph.D. Student, Department of Statistics, Purdue University, West Lafayette, Indiana

Abstract:
In this article we will attempt to deal with the problem of finding option prices when the volatility component of the price is stochastic. We will first show how to estimate the distribution of the volatility component then using it we will construct a tree which will converge to the Stock Price Process. The tree will be recombining and using it we will be able to compute European Option Values and to a degree American Options as well.

Comment: If one attended the Friday, April 9, Computational Finance Seminar one will find the idea of that talk similar with what we are trying to accomplish here. However, we will use a different method to simulate the distribtion of the volatility process and we will take that talk a step further by actually using this volatility distribution to price options on the stock.