Binomial tree for option valuation process derived from stochastic autonomous differential equation

Ingeniería y Ciencia

Marín-Sánchez, Freddy¹ 

[1] Universidad EAFIT, Medellín, Colombia

关键词: stochastic differential equations;    binomial trees;    transition probabilities;    pricing of options;   

DOI  :  

学科分类：工程和技术（综合）

来源: Universidad E A F I T

【 摘 要 】

In this paper we propose a multiplicative generalized binomial trees recombination associated with the autonomous equation in terms of the initial condition and the product of non-constant upwards and downwards jumps from the discretized process. We present a formal technique for finding the dynamic transition probabilities involving the first two moments of the solution to the differential equation, which incorporate the factor of growth and volatility in terms of the parameters and the underlying process along its branching. Some experimental numerical results are shown for European option pricing for log- normal process and the processes of mean reversion with additive noise and proportional noise for different expiration dates.

【 授权许可】

CC BY