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The random-time binomial model

✍ Scribed by Dietmar P.J. Leisen

Publisher
Elsevier Science
Year
1999
Tongue
English
Weight
314 KB
Volume
23
Category
Article
ISSN
0165-1889

No coin nor oath required. For personal study only.

✦ Synopsis

In this paper we study a binomial model with random time steps and explain how to calculate values for European and American call and put options. We prove both weak convergence of the discrete processes to the Black}Scholes setup and convergence of the values for European and American put options. Computational experiments exhibit a smooth convergence structure and suggest that we can obtain a quadratic order of convergence via an extrapolation procedure. Approximations to jump-di!usions are straightforward.

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