Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques

The purpose of this paper is to compare a variety of approximation techniques for valuing contingent contracts when analytic solutions do not exist. The comparison is made with respect to the differences in both the approximation theory and the efficiency of the computation algorithms. The focus of...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1985-03, Vol.20 (1), p.45-71
Main Authors: Geske, Robert, Shastri, Kuldeep
Format: Article
Language:English
Subjects:
Approximation
Binomials
Call options
Cash
Contingent
Contracts
Dividends
Financial
Finite difference methods
Mathematical models
Methods
Monte Carlo simulation
Put & call options
Put options
Statistical analysis
Stock prices
Techniques
Theory
Valuation
Values
Yield
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Summary:The purpose of this paper is to compare a variety of approximation techniques for valuing contingent contracts when analytic solutions do not exist. The comparison is made with respect to the differences in both the approximation theory and the efficiency of the computation algorithms. The focus of the computational comparison is upon binomial and finite difference methods applied to option valuation models with one stochastic variable. However, many of the results would generalize to pricing corporate securities, and also to certain aspects of problems involving multiple stochastic variables.
ISSN:0022-1090
1756-6916
DOI:10.2307/2330677