On strong causal binomial approximation for stochastic processes

DOI10.3934/DCDSB.2014.19.1549zbMATH Open1302.60056arXiv1311.0675OpenAlexW1968316808MaRDI QIDQ478653FDOQ478653

Authors: Nikolai Dokuchaev 

Publication date: 4 December 2014

Published in: Discrete and Continuous Dynamical Systems. Series B (Search for Journal in Brave)

Abstract: 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.

Full work available at URL: https://arxiv.org/abs/1311.0675

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zbMATH Keywords

stochastic processesincomplete marketbinomial approximationDonsker theoremcomplete market[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=discretization+of+It%EF%BF%BD%EF%BF%BD+equations&go=Go discretization of It�� equations]

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Functional limit theorems; invariance principles (60F17) Stochastic models in economics (91B70) Stochastic difference equations (39A50) Modulation and demodulation in information and communication theory (94A14)

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Cited In (1)

• On limiting theorems for conditional causation probabilities of multiple-run-rules

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