The Rate Of Convergence In The Binomial Model
Date Issued
2004
Date
2004
Author(s)
Chang, Lobin
DOI
en-US
Abstract
In a recent article, Heston and Zhou (2000) proved that the rate of convergence of CRR binomial
model depends on the smoothness of option payoff function(C2 function) is as fast as 1/n
and had proved that the rate of convergence of European call option is as fast as 1/sqrt{n}.
(The European call option payoff function is a continuous function, but not C2 function)
In 1999, Yisong ``San' Tian developed the Flexible Binomial model and for European call option
he discovered that the error ratio in this model tends to 2 by numerical experiment, but he
did not give the proof. In this paper, we prove that the rate of convergence of the Digital
European call option with discountinuous payoff function is as fast as 1/sqrt{n} .
Moreover, in the Flexible Binomial Option Pricing Model,we find the error ratio tends to sqrt{2}
and prove this result. In addition, we prove the rate of convergence of European call option is
as fast as 1/n and the error ratio tends to 2 for the Flexible Binomial Option Pricing Model.
Subjects
買權
數位選擇權
偏位
可變形二項模型
Flexible binomial method
tilt
digital option
call option pricing
Type
thesis
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