Binomial approximation of Brownian motion and its maximum
Motivated by some typical option pricing problems, we study how to estimate quantities of the form by replacing the Brownian motion (Bt)t[greater-or-equal, slanted]0 with a binomial random walk. The approximating term can be explicitly computed, without using any simulation. We investigate the rate of convergence of this approximation method and we study some applications, in particular the case of barrier options.
Volume (Year): 69 (2004)
Issue (Month): 3 (September)
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- Gobet, Emmanuel, 2000. "Weak approximation of killed diffusion using Euler schemes," Stochastic Processes and their Applications, Elsevier, vol. 87(2), pages 167-197, June.
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