The Multinomial Option Pricing Model and Its Brownian and Poisson Limits
AbstractThe Cox, Ross, and Rubinstein binomial model is generalized to the multinomial case. Limits are investigated and shown to yield the Black-Scholes formula in the case of continuous sample paths for a wide variety of complete market structures. In the discontinuous case a Merton-type formula is shown to result, provided jump probabilities are replaced by their corresponding Arrow-Debreu prices.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1162.
Length: 15 pages
Date of creation: Jan 1990
Date of revision:
Publication status: Published in The Review of Financial Studies, 1989 Volume 2, Number 2, pp. 251-265
Multinomial; option; pricing; Brownian; Poisson;
Other versions of this item:
- Madan, Dilip B & Milne, Frank & Shefrin, Hersh, 1989. "The Multinomial Option Pricing Model and Its Brownian and Poisson Limits," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 251-65.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Hranaiova, Jana & Tomek, William G., 2000. "Delivery Option In Futures Contracts And Basis Behavior At Contract Maturity," 2000 Annual meeting, July 30-August 2, Tampa, FL 21732, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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- Dilip B. Madan & Frank Milne, 1991.
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Wiley Blackwell, vol. 1(4), pages 39-55.
- Mark Broadie & Jérôme B. Detemple, 1996. "Recent Advances in Numerical Methods for Pricing Derivative Securities," CIRANO Working Papers 96s-17, CIRANO.
- Luenberger, David G., 1998. "Products of trees for investment analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1403-1417, August.
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