Multi-Purpose Binomial Model: Fitting all Moments to the Underlying Geometric Brownian Motion

2016/12/06 by Kim, Y. S., Stoyanov, S., Rachev, S. +1 · 3 citations
#FOS: Economics and business #Pricing of Securities (q-fin.PR)

paper · doi:10.48550/arxiv.1612.01979

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.

Cited by

• Nonuniform-Grid Markov Chain Approximation of Continuous Processes with Time-Linear Moments
• Asset Pricing in the Presence of Market Microstructure Noise
• Implied Probabilities and Volatility in Credit Risk: A Merton-Based Approach with Binomial Trees

Related

• Enhancing Binomial and Trinomial Equity Option Pricing Models
• A q-binomial extension of the CRR asset pricing model
• Modeling Stock Return Distributions and Pricing Options
• Black-Scholes without stochastics or PDEs
• Pricing basket options with the first three moments of the basket: log-normal models and beyond