Journal of Computational Finance

The GARCH option pricing model: a lattice approach

Nusret Cakici, Kudret Topyan


Building a recombining trinomial or multinomial tree under discrete-time generalized GARCH process is more difficult than one might have thought. Trinomial (or multinomial) trees are constructed to enable pricing of derivative securities under GARCH processes. The authors introduce important modifications to the method proposed by Ritchken and Trevor (1999). The algorithm is made more accurate by modifying the forward-building process and actually using interpolated variances only during the backward recursion process. This would yield a volatility pattern consistent with the true volatility process. The new algorithm, with its strong convergence properties, will compute the option prices very accurately. The modifications in this paper improve the model without making the algorithm less efficient.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here