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 -