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Convergence of strategies: An approach using Clark-Haussmann's formula

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  • Jan Pedersen

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    (Departments of Mathematical Sciences, University of Aarhus, Ny Munkegade, DK-8000 Aarhus C, Denmark Manuscript)

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    Abstract

    We consider a binomial model that converges towards a Black-Scholes model as the number of trading dates increases to infinity. The models considered are complete and hence every claim is generated by an appropriate trading strategy. Fixing a path dependent claim the paper treats weak and pathwise convergence of the corresponding strategy. It is well known that in a binomial model the generating strategy is easily expressed in terms of stock prices and prices of the claim. In contrast, the Black-Scholes model essentially only allows an explicit representation when the underlying claim is differentiable (in some sense), in which case the strategy is defined in terms of Clark-Haussmann's Formula. Hence, attention is restricted to the case when the claim is differentiable. The strategy is then shown to be convergent and a (very simple) version of Clark-Haussmann's Formula is established.

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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 3 (1999)
    Issue (Month): 3 ()
    Pages: 323-344

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    Handle: RePEc:spr:finsto:v:3:y:1999:i:3:p:323-344

    Note: received: October 1997; final version received: August 1998
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    Related research

    Keywords: Binomial and Black-Scholes models; complete markets; Clark-Haussmann's formula; convergence of strategies;

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