On strong binomial approximation for stochastic processes and applications for financial modelling
AbstractThis paper considers binomial approximation of continuous time stochastic processes. It is shown that, under some mild integrability conditions, a process can be approximated in mean square sense and in other strong metrics by adapted binomial processes, i.e., by processes with fixed size binary increments at sampling points. In addition, possibility of approximation of solutions of stochastic differential equations by solutions of ordinary equations with binary noise is established. Some consequences for the financial modelling and options pricing models are discussed.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1311.0675.
Date of creation: Nov 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
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- Nikolai Dokuchaev, 2012. "On statistical indistinguishability of the complete and incomplete markets," Science & Finance (CFM) working paper archive 1209.4695, Science & Finance, Capital Fund Management, revised May 2013.
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