Journal of Computational Finance

Risk.net

A generalized multinomial method for option pricing in several dimensions

Thomas Gustafsson and Houari Merabet

ABSTRACT

This paper outlines a method for calculating option prices using the Green function and Gaussian quadrature. Multidimensional formulas for analytical transition probabilities are presented. We derive an algorithm that intuitively can be described as a generalized multinomial algorithm, or as an approximating Markov chain. For speed, we change variables in a special way and sample points using Gaussian quadrature. The efficiency of the method is assessed by comparing the numerical results to that of other methods, such as finite differences and binomial lattices. We address the American put problem, basket options, and the effects of stochastic volatility.

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 Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net 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