Error estimates for binomial approximations of game options
We justify and give error estimates for binomial approximations of game (Israeli) options in the Black--Scholes market with Lipschitz continuous path dependent payoffs which are new also for usual American style options. We show also that rational (optimal) exercise times and hedging self-financing portfolios of binomial approximations yield for game options in the Black--Scholes market ``nearly'' rational exercise times and ``nearly'' hedging self-financing portfolios with small average shortfalls and initial capitals close to fair prices of the options. The estimates rely on strong invariance principle type approximations via the Skorokhod embedding.
|Date of creation:||Jul 2006|
|Date of revision:|
|Publication status:||Published in Annals of Applied Probability 2006, Vol. 16, No. 2, 984-1033|
|Contact details of provider:|| Web page: http://arxiv.org/|
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- Andreas Kyprianou, 2004. "Some calculations for Israeli options," Finance and Stochastics, Springer, vol. 8(1), pages 73-86, January.
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- Kaushik Amin & Ajay Khanna, 1994. "Convergence Of American Option Values From Discrete- To Continuous-Time Financial Models," Mathematical Finance, Wiley Blackwell, vol. 4(4), pages 289-304.
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