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Binomial approximation in financial models: computational simplicity and convergence

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  • Anlong Li
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    Abstract

    An exploration of the potential of transformation and other schemes in approximating diffusions (including those with boundaries) commonly seen in financial models. Convergence results are established for valuing both European and American contingent claims.

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    File URL: http://www.clevelandfed.org/research/Workpaper/1992/wp9201.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9201.

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    Date of creation: 1992
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    Handle: RePEc:fip:fedcwp:9201

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    Keywords: Statistics;

    References

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    1. Trigeorgis, Lenos, 1991. "A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 309-326, September.
    2. Hull, John & White, Alan, 1990. "Valuing Derivative Securities Using the Explicit Finite Difference Method," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 87-100, March.
    3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    4. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    5. Amin, Kaushik I., 1991. "On the Computation of Continuous Time Option Prices Using Discrete Approximations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 477-495, December.
    6. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
    7. Nelson, Daniel B & Ramaswamy, Krishna, 1990. "Simple Binomial Processes as Diffusion Approximations in Financial Models," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 393-430.
    8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    9. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
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