Binomial tree for option valuation process derived from stochastic autonomous differential equation
This paper proposes a recombination in binomial trees multiplicatively generalized for the autonomous equation, in terms of the initial condition and the product between non-constant jumps up and down the discretized process. A technique is formally presented to find dynamic transition probabilities...
- Autores:
-
Marín Sánchez, Freddy Hernán
- Tipo de recurso:
- Fecha de publicación:
- 2010
- Institución:
- Universidad EAFIT
- Repositorio:
- Repositorio EAFIT
- Idioma:
- spa
- OAI Identifier:
- oai:repository.eafit.edu.co:10784/14485
- Acceso en línea:
- http://hdl.handle.net/10784/14485
- Palabra clave:
- Stochastic Differential Equations
Binomial Trees
Transition Probabilities
Options Valuation
Ecuaciones Diferenciales Estocásticas
Árboles Binomiales
Probabilidades de transición
Valoración de Opciones
- Rights
- License
- Copyright (c) 2010 Freddy Marín-Sánchez
| Summary: | This paper proposes a recombination in binomial trees multiplicatively generalized for the autonomous equation, in terms of the initial condition and the product between non-constant jumps up and down the discretized process. A technique is formally presented to find dynamic transition probabilities considering the first two moments of the differential equation solution process, which incorporates the growth factor and volatility in terms of the parameters and the underlying process throughout its branching. Some experimental numerical results of valuation of European options for the log – normal process and for the mean reversion processes with additive noise and proportional noise for different expiration dates are shown. |
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