Journal of Computational Finance

Risk.net

The modified willow tree algorithm

Ulrich G. Haussmann, Liqing Yan

ABSTRACT

We develop a modified willow tree algorithm for option pricing. Our numerical results show that the modified algorithm approximates the true prices more quickly and precisely than the binomial tree algorithm, especially in d-factor models for d = 2, 3, 4, 5. A bound on the theoretical rate of convergence of the modified willow tree algorithm is established.

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