This thesis compares the fitting and hedging performance of four binomial tree model i.e. SBT, IBT, GBT and IVT. For obtaining the Future Probability Distribution of the Underlying Asset to construct Implied Binomial Tree and Generalized Binomial Tree, I use Rubinstein’s Optimization with prior guess. And I use Lim and Zhi’s five different weight functions in Generalized Binomial Tree.
Because the closing time of spot and options in KOSPI 200 index is different, I use specific 1-minute settlement data(14:50) in KOSPI 200 index spot and options prices from May 2001 to March 2002. With options traded on the KOSPI 200 index, four models are constructed and their fitting and hedging performance are compared in all three categories- moneyness, expiration date and option type with four measure-ME, MPE, MSE, MAPE.
Surprisingly, SBT with constant volatility shows better performance than implied models having more market information.
