https://scholars.lib.ntu.edu.tw/handle/123456789/414519
Title: | Option pricing in a multi-asset, complete market economy | Authors: | Chen R.-R. Chung S.-L. Yang T.T. |
Issue Date: | 2002 | Journal Volume: | 37 | Journal Issue: | 4 | Start page/Pages: | 649-666 | Source: | Journal of Financial and Quantitative Analysis | Abstract: | This paper extends the seminal Cox-Ross-Rubinstein ((1979), CRR hereafter) binomial model to multiple assets. It differs from previous models in that it is derived under the complete market environment specified by Duffle and Huang (1985) and He (1990). The complete market assumption requires the number of states to grow linearly with the number of assets. However, the number of correlations grows at a faster rate, causing the CRR model to be indirectly extendable. We solve such a problem by recognizing that the fast growing correlation number is matched by the number of the angles of the edges of a hypercube spanned by the risky assets. As a result, we derive a solution that allows the number of equations to equal the number of risky assets and the riskless bond. The resulting tree structure hence provides the same intuition of pricing and hedging contingent claims as that provided by the CRR model. Finally, the proposed model is not only as easy to implement as the one-dimensional CRR model but also it is more memory efficient than the existing multi-factor lattice models. |
URI: | https://scholars.lib.ntu.edu.tw/handle/123456789/414519 | ISSN: | 00221090 | DOI: | 10.2307/3595015 |
Appears in Collections: | 財務金融學系 |
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