Option valuation by a self-exciting threshold binomial model
This paper introduces a discrete-time self-exciting threshold binomial model to price derivative securities. The key idea is to incorporate the regime switching effect in a discrete-time binomial model for an asset's prices via the "self-exciting" threshold principle. The proposed model provides a simple structure for pricing options in a changing economic environment. Numerical examples for the proposed threshold binomial model as well as their trinomial extension are given. (C) 2012 Elsevier Ltd. All rights reserved.
option valuation self-exciting binomial models regime switching threshold principle trinomial extensions