Binomial Option Valuation Model With Adaptive Swing Factor

This paper presents a new Binomial option valuation model which is with an adaptive swing factor. The existing versions of the Binomial model are developed based on fixed swing factor and results from fixed swing factor models are commonly associated with Snon-linear error propagations which translates to non-monotonic convergence and reduced accuracy in application to option pricing. In order to overcome this challenge, we adopt swing factors which are functions of the step number(n). The accuracy, convergence and stability behavior of the Binomial option pricing model with adaptive swing factor (up and down move size) are all investigated. The Adaptive Factor Model when compared with two popular versions of the traditional Binomial models - the Cox, Ross and Rubinstein (CRR) model [3], the Jarrow and Rudd (JR) model [5], a more recent Leisen and Reimer (LR) [3] model registered more accurate performances, especially with respect to option pricing.