Multi-purpose binomial model: fitting all moments to the underlying geometric Brownian motion

DOI10.1016/J.ECONLET.2016.05.035zbMATH Open1400.91654arXiv1612.01979OpenAlexW2412419817MaRDI QIDQ1670205FDOQ1670205

Authors: Peng Zhang 

Publication date: 5 September 2018

Published in: Economics Letters (Search for Journal in Brave)

Abstract: We construct a binomial tree model fitting all moments to the approximated geometric Brownian motion. Our construction generalizes the classical Cox-Ross-Rubinstein, the Jarrow-Rudd, and the Tian binomial tree models. The new binomial model is used to resolve a discontinuity problem in option pricing.

Full work available at URL: https://arxiv.org/abs/1612.01979

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zbMATH Keywords

option pricinggeometric Brownian motionpartial hedgingbinomial tree model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Numerical methods (including Monte Carlo methods) (91G60)

Cites Work

• Title not available (Why is that?)
• Option pricing: A simplified approach
• Title not available (Why is that?)
• On a non-classical invariance principle

Cited In (15)

• A parameter estimation of binomial models
• Random dynamics and finance: constructing implied binomial trees from a predetermined stationary density
• On simple binomial approximations for two variable functions in finance applications
• A new type of triple method for option pricing
• Pricing derivatives on multiple assets: recombining multinomial trees based on Pascal's simplex
• Option pricing in markets with informed traders
• Binomial models for interest rates
• Generalized Cox-Ross-Rubinstein binomial models
• Security price modelling by a binomial tree
• Johnson binomial trees
• Market complete option valuation using a Jarrow-Rudd pricing tree with skewness and kurtosis
• The measure transformation of the binomial model and its application
• The decoupling approach to binomial pricing of multi-asset options
• Non-tradability interval for heterogeneous rational players in the option markets
• Binomial trees as dynamical systems

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