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Multivariate Binomial Approximations for Asset Prices with Nonstationary Variance and Covariance Characteristics

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  • Ho, Teng-Suan
  • Stapleton, Richard C
  • Subrahmanyam, Marti G

Abstract

In this article, we suggest an efficient method of approximating a general, multivariate log-normal distribution by a multivariate binomial process. There are two important features of such multivariate distributions. First, the state variables may have volatilities that change over time. Second, the two or more relevant state variables involved may covary with each other in a specified manner, with a time-varying covariance structure. We discuss the asymptotic properties of the resulting processes and show how the methodology can be used to value a complex, multiple exercisable option whose payoff depends on the prices of two assets. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Ho, Teng-Suan & Stapleton, Richard C & Subrahmanyam, Marti G, 1995. "Multivariate Binomial Approximations for Asset Prices with Nonstationary Variance and Covariance Characteristics," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1125-1152.
  • Handle: RePEc:oup:rfinst:v:8:y:1995:i:4:p:1125-52
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    Cited by:

    1. Niffikeer, Cindy I. & Hewins, Robin D. & Flavell, Richard B., 2000. "A synthetic factor approach to the estimation of value-at-risk of a portfolio of interest rate swaps," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1903-1932, December.
    2. repec:kap:jrefec:v:55:y:2017:i:2:d:10.1007_s11146-016-9576-x is not listed on IDEAS
    3. Viral V. Acharya & Jennifer N. Carpenter, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," Review of Financial Studies, Society for Financial Studies, pages 1355-1383.
    4. Joshua V. Rosenberg, 2003. "Nonparametric pricing of multivariate contingent claims," Staff Reports 162, Federal Reserve Bank of New York.
    5. Rosenberg, Joshua V., 1998. "Pricing multivariate contingent claims using estimated risk-neutral density functions," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 229-247, April.
    6. Ho, T. S. & Stapleton, Richard C. & Subrahmanyam, Marti G., 1997. "The valuation of American options on bonds1," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1487-1513, December.
    7. Yoram Landskroner & Alon Raviv, 2008. "The valuation of inflation‐indexed and FX convertible bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(7), pages 634-655, July.
    8. Sandra Peterson & Richard Stapleton, 2002. "The pricing of Bermudan-style options on correlated assets," Review of Derivatives Research, Springer, pages 127-151.
    9. Sandra Peterson & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "The Valuation of American-Style Swaptions in a Two-factor Spot-Futures Model," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-078, New York University, Leonard N. Stern School of Business-.
    10. R.C. Stapleton & Marti G. Subrahmanyam, 1999. "The Term Structure of Interest Rate-Futures Prices," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-045, New York University, Leonard N. Stern School of Business-.
    11. Katarzyna Toporek, 2012. "Simple is better. Empirical comparison of American option valuation methods," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 29.
    12. Hahn, Warren J. & Dyer, James S., 2008. "Discrete time modeling of mean-reverting stochastic processes for real option valuation," European Journal of Operational Research, Elsevier, vol. 184(2), pages 534-548, January.
    13. Joshua Rosenberg, 1999. "Semiparametric Pricing of Multivariate Contingent Claims," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-028, New York University, Leonard N. Stern School of Business-.

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