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Multivariate Binomial Approximations for Asset Prices with Nonstationary Variance and Covariance Characteristics

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  • Ho, Teng-Suan
  • Stapleton, Richard C
  • Subrahmanyam, Marti G
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    Abstract

    In this article, we suggest an efficient method of approximating a general, multivariate log-normal distribution by a multivariate binomial process. There are two important features of such multivariate distributions. First, the state variables may have volatilities that change over time. Second, the two or more relevant state variables involved may covary with each other in a specified manner, with a time-varying covariance structure. We discuss the asymptotic properties of the resulting processes and show how the methodology can be used to value a complex, multiple exercisable option whose payoff depends on the prices of two assets. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 8 (1995)
    Issue (Month): 4 ()
    Pages: 1125-52

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    Handle: RePEc:oup:rfinst:v:8:y:1995:i:4:p:1125-52

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    Cited by:
    1. Katarzyna Toporek, 2012. "Simple is better. Empirical comparison of American option valuation methods," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, Faculty of Economic Sciences, University of Warsaw, vol. 29.
    2. Niffikeer, Cindy I. & Hewins, Robin D. & Flavell, Richard B., 2000. "A synthetic factor approach to the estimation of value-at-risk of a portfolio of interest rate swaps," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1903-1932, December.
    3. Joshua Rosenberg, 1996. "Pricing Multivariate Contingent Claims Using Estimated Risk-neutral Density Functions," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 96-36, New York University, Leonard N. Stern School of Business-.
    4. Yoram Landskroner & Alon Raviv, 2004. "The Valuation of Inflation-Indexed and FX Convertible Bonds," Finance, EconWPA 0401005, EconWPA.
    5. Acharya, Viral V & Carpenter, Jennifer, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3328, C.E.P.R. Discussion Papers.
    6. Joshua V. Rosenberg, 2003. "Nonparametric pricing of multivariate contingent claims," Staff Reports 162, Federal Reserve Bank of New York.
    7. Sandra Peterson & Richard Stapleton, 2002. "The pricing of Bermudan-style options on correlated assets," Review of Derivatives Research, Springer, Springer, vol. 5(2), pages 127-151, May.
    8. Joshua Rosenberg, 1999. "Semiparametric Pricing of Multivariate Contingent Claims," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-028, New York University, Leonard N. Stern School of Business-.
    9. R.C. Stapleton & Marti G. Subrahmanyam, 1999. "The Term Structure of Interest Rate-Futures Prices," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-045, New York University, Leonard N. Stern School of Business-.
    10. Sandra Peterson & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "The Valuation of American-Style Swaptions in a Two-factor Spot-Futures Model," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-078, New York University, Leonard N. Stern School of Business-.

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