Tree Models in Finance

Overview


Tree models are used to model the evolution of a stock price or some other time series in a discrete way. Each level of the tree represents a point in time, and each node a sample point at that time.

Tree models can generally be classified by how many points are reachable in the next time period from the current node. The standard model is the binary tree, from which two nodes are available from any given node, but other trees are sometimes used as well.

  • Binomial Tree