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On the errors and comparison of Vega estimation methods

Shackleton, M B and Chung, S L (2003) On the errors and comparison of Vega estimation methods. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    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

    Item Type: Monograph (Working Paper)
    Uncontrolled Keywords: Vega ; lattice approach ; discretization error ; smoothing
    Subjects: UNSPECIFIED
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48687
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:06
    Refereed?: No
    Published?: Published
    Last Modified: 17 Sep 2013 18:25
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48687

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