Error estimates for binomial approximations of game options
AbstractWe justify and give error estimates for binomial approximations of game (Israeli) options in the Black--Scholes market with Lipschitz continuous path dependent payoffs which are new also for usual American style options. We show also that rational (optimal) exercise times and hedging self-financing portfolios of binomial approximations yield for game options in the Black--Scholes market ``nearly'' rational exercise times and ``nearly'' hedging self-financing portfolios with small average shortfalls and initial capitals close to fair prices of the options. The estimates rely on strong invariance principle type approximations via the Skorokhod embedding.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number math/0607123.
Date of creation: Jul 2006
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Publication status: Published in Annals of Applied Probability 2006, Vol. 16, No. 2, 984-1033
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