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On strong binomial approximation for stochastic processes and applications for financial modelling

Listed author(s):
  • Nikolai Dokuchaev
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    This paper considers binomial approximation of continuous time stochastic processes. It is shown that, under some mild integrability conditions, a process can be approximated in mean square sense and in other strong metrics by binomial processes, i.e., by processes with fixed size binary increments at sampling points. Moreover, this approximation can be causal, i.e., at every time it requires only past historical values of the underlying process. In addition, possibility of approximation of solutions of stochastic differential equations by solutions of ordinary equations with binary noise is established. Some consequences for the financial modelling and options pricing models are discussed.

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    Paper provided by in its series Papers with number 1311.0675.

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    Date of creation: Nov 2013
    Date of revision: Feb 2015
    Handle: RePEc:arx:papers:1311.0675
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    1. Heath, David & Jarrow, Robert & Morton, Andrew, 1990. "Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 419-440, December.
    2. Nikolai Dokuchaev, 2012. "On statistical indistinguishability of the complete and incomplete markets," Papers 1209.4695,, revised May 2013.
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