|
Saw Toothed Convergence
|
A phenomenon associated with using numerical methods to price options. The approximation to the analytical value improves with the number of periods, then gets worse, then again improves, and then worsens, repeating this pattern as it approaches the analytical value. This problem occurs when using a binomial tree to price barrier options and is caused by option specification error. See also Option Specification Error, Quantization Error.
|
