English, Article, Journal or magazine article edition: The Random-Time Binomial Model Leisen, Dietmar

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Bookmark: http://trove.nla.gov.au/version/52064
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Random-Time Binomial Model
Author
  • Leisen, Dietmar
Physical Description
  • preprint
Notes
  • In this paper we study Binomial Models with random time steps. We explain, how calculating values for European and American Call and Put options is straightforward for the Random-Time Binomial Model. We present the conditions to ensure weak-convergence to the Black-Scholes setup and convergence of the values for European and American put options. Differently to the CRR-model the convergence behaviour is extremely smooth in our model. By using extrapolation we therefore achieve order of convergence two. This way it is an efficient tool for pricing purposes in the Black-Scholes setup, since the CRR model and its extrapolations typically achieve order one. Moreover our model allows in a straightforward manner to construct approximations to jump-diffusions. The simple valuation approaches and the convergence properties carry immediately over from the Black-Scholes case.
  • binomial model, order of convergence, smoothing, extrapolation, jump-diffusion
  • RePEc:bon:bonsfb:399
Language
  • English
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