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Discrete Dynamics in Nature and Society - Volume 2014 2014, Article ID 624360, 7 pages -

Research Article

School of Economics and Management, Southeast University, Nanjing 210096, China

School of Economics and Management, Nanjing University of Information Science & Technology, Nanjing 210044, China

Received 14 March 2014; Revised 25 June 2014; Accepted 26 June 2014; Published 16 July 2014

Academic Editor: Beatrice Paternoster

Copyright © 2014 Hu Xiaoping et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


A trinomial Markov tree model is studied for pricing options in which the dynamics of the stock price are modeled by the first-order Markov process. Firstly, we construct a trinomial Markov tree with recombining nodes. Secondly, we give an algorithm for estimating the risk-neutral probability and provide the condition for the existence of a validation risk-neutral probability. Thirdly, we propose a method for estimating the volatilities. Lastly, we analyze the convergence and sensitivity of the pricing method implementing trinomial Markov tree. The result shows that, compared to binomial Markov tree, the proposed model is a natural combining tree and, while changing the probability of the node, it is still combining, so the computation is very fast and very easy to be implemented.

Author: Hu Xiaoping, Guo Jiafeng, Du Tao, Cui Lihua, and Cao Jie



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