Research output: Working paper
Research output: Working paper
}
TY - UNPB
T1 - On the errors and comparison of Vega estimation methods
AU - Shackleton, M B
AU - Chung, S L
PY - 2003
Y1 - 2003
N2 - This article discusses convergence problems when calculating Vega (option sensitivity to volatility) that arise from discretization errors embedded in the lattice approach. Four alternative improvements to the traditional binomial method are discussed and investigated for performance. We also propose a new Modified Binomial (MB) Method to calculate Vegas. Numerical results show that although the MB is not the most price accurate of the models, due to its error structure as a function of volatility, it produces the most accurate and fastest Vega estimates
AB - This article discusses convergence problems when calculating Vega (option sensitivity to volatility) that arise from discretization errors embedded in the lattice approach. Four alternative improvements to the traditional binomial method are discussed and investigated for performance. We also propose a new Modified Binomial (MB) Method to calculate Vegas. Numerical results show that although the MB is not the most price accurate of the models, due to its error structure as a function of volatility, it produces the most accurate and fastest Vega estimates
KW - Vega
KW - lattice approach
KW - discretization error
KW - smoothing
M3 - Working paper
T3 - Accounting and Finance Working Paper Series
BT - On the errors and comparison of Vega estimation methods
PB - The Department of Accounting and Finance
CY - Lancaster University
ER -