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On the binomial approximation of the American put

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  • Damien Lamberton

    (LAMA, MATHRISK)

Abstract

We consider the binomial approximation of the American put price in the Black-Scholes model (with continuous dividend yield). Our main result is that the error of approximation is $O((ln n) $\alpha$ /n)$ where n is the number of time periods and the exponent $\alpha$ is a positive number, the value of which may differ according to the respective levels of the interest rate and the dividend yield.

Suggested Citation

  • Damien Lamberton, 2018. "On the binomial approximation of the American put," Papers 1802.05614, arXiv.org, revised Dec 2018.
    • Handle: RePEc:arx:papers:1802.05614
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    References listed on IDEAS

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    1. Patrick Jaillet & Damien Lamberton & Bernard Lapeyre, 1990. "Variational inequalities and the pricing of American options," Post-Print hal-01667008, HAL.
    2. Guy Barles & Julien Burdeau & Marc Romano & Nicolas Samsoen, 1995. "Critical Stock Price Near Expiration," Mathematical Finance, Wiley Blackwell, vol. 5(2), pages 77-95, April.
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    Cited by:

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    2. Ashish Dhiman & Yibei Hu, 2023. "Physics Informed Neural Network for Option Pricing," Papers 2312.06711, arXiv.org.

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