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On the errors and comparison of Vega estimation methods

Research output: Working paper

Publication date2003
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
<mark>Original language</mark>English

Publication series

NameAccounting and Finance Working Paper Series


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