Binomial approximation of Brownian motion and its maximum
AbstractMotivated by some typical option pricing problems, we study how to estimate quantities of the form by replacing the Brownian motion (Bt)t[greater-or-equal, slanted]0 with a binomial random walk. The approximating term can be explicitly computed, without using any simulation. We investigate the rate of convergence of this approximation method and we study some applications, in particular the case of barrier options.
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Bibliographic InfoArticle provided by Elsevier in its journal Statistics & Probability Letters.
Volume (Year): 69 (2004)
Issue (Month): 3 (September)
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Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/622892/description#description
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- Gobet, Emmanuel, 2000. "Weak approximation of killed diffusion using Euler schemes," Stochastic Processes and their Applications, Elsevier, vol. 87(2), pages 167-197, June.
- Leduc, Guillaume, 2012. "European Option General First Order Error Formula," MPRA Paper 42015, University Library of Munich, Germany, revised 01 Oct 2012.
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