Abstract
Abstract In this paper, we consider the non-recombining trinomial tree pricing model under the volatility, which is a function of time, establish the option pricing model and give the convergence rates of the non-recombining trinomial tree method. In addition, we research the calibration problem of volatility and adopt an exterior penalty method to transform this problem into a nonlinear unconstrained optimization problem. For the optimization problem, we use the quasi-Newton algorithm. Finally, we test our model by numerical examples and options data on the S&P 500 index. The results show the effectiveness of the non-recombining trinomial tree pricing model.
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