On the binomial approximation of the American put

DOI10.1007/S00245-018-9545-2MaRDI QIDQ2198165zbMATH OpenOpenAlexWikidataFDO

Authors Damien Lamberton

Publication date 9 September 2020

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1802.05614

zbMATH Keywords

American put option pricebinomial approximationBlack-Scholes model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We consider the binomial approximation of the American put price in the Black-Scholes model (with continuous dividend yield). Our main result is that the error of approximation is $O((lnn)$alpha$/n)$ where n is the number of time periods and the exponent $alpha$ is a positive number, the value of which may differ according to the respective levels of the interest rate and the dividend yield.

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Cites work

• American-type options. Stochastic approximation methods. Volume 2
• Asymptotics of the price oscillations of a European call option in a tree model
• Brownian optimal stopping and random walks
• Critical price near maturity for an American option on a dividend-paying stock.
• CRITICAL STOCK PRICE NEAR EXPIRATION
• scientific article; zbMATH DE number 3716008 (Why is no real title available?)
• Optimal convergence rate of the binomial tree scheme for American options with jump diffusion and their free boundaries
• Parabolic variational inequalities in one space dimension and smoothness of the free boundary
• The rate of convergence of the binomial tree scheme
• Variational inequalities and the pricing of American options

Cited in

(9)

• Pricing the American put option: A detailed convergence analysis for binomial models
• Error estimates for the binomial approximation of American put options
• The random-time binomial model
• Error estimates for approximations of American put option price
• On the rate of convergence of the binomial tree scheme for American options
• On strong causal binomial approximation for stochastic processes
• The two-point Geske-Johnson approximation of American put option pricing
• scientific article; zbMATH DE number 956699 (Why is no real title available?)
• Error estimates for binomial approximations of game options

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