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Error estimates for binomial approximations of game options

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  • Yuri Kifer

Abstract

We justify and give error estimates for binomial approximations of game (Israeli) options in the Black--Scholes market with Lipschitz continuous path dependent payoffs which are new also for usual American style options. We show also that rational (optimal) exercise times and hedging self-financing portfolios of binomial approximations yield for game options in the Black--Scholes market ``nearly'' rational exercise times and ``nearly'' hedging self-financing portfolios with small average shortfalls and initial capitals close to fair prices of the options. The estimates rely on strong invariance principle type approximations via the Skorokhod embedding.

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  • Yuri Kifer, 2006. "Error estimates for binomial approximations of game options," Papers math/0607123, arXiv.org.
    • Handle: RePEc:arx:papers:math/0607123
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    References listed on IDEAS

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    1. Friedrich Hubalek & Walter Schachermayer, 1998. "When Does Convergence of Asset Price Processes Imply Convergence of Option Prices?," Mathematical Finance, Wiley Blackwell, vol. 8(4), pages 385-403, October.
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    3. Kaushik Amin & Ajay Khanna, 1994. "Convergence Of American Option Values From Discrete‐ To Continuous‐Time Financial Models1," Mathematical Finance, Wiley Blackwell, vol. 4(4), pages 289-304, October.
    4. Gapeev Pavel V. & Kühn Christoph, 2005. "Perpetual convertible bonds in jump-diffusion models," Statistics & Risk Modeling, De Gruyter, vol. 23(1/2005), pages 15-31, January.
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    6. Baurdoux, Erik J. & Kyprianou, Andreas E., 2004. "Further calculations for Israeli options," LSE Research Online Documents on Economics 23916, London School of Economics and Political Science, LSE Library.
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    Cited by:

    1. Guo, Peidong & Zhang, Jizhou & Wang, Qian, 2020. "Path-dependent game options with Asian features," Chaos, Solitons & Fractals, Elsevier, vol. 141(C).
    2. Yan Dolinsky & Yuri Kifer, 2008. "Binomial approximations of shortfall risk for game options," Papers 0811.1896, arXiv.org.
    3. Yuri Kifer, 2020. "Error estimates for discrete approximations of game options with multivariate diffusion asset prices," Papers 2012.01257, arXiv.org, revised Dec 2021.
    4. Yuri Kifer, 2007. "Correction. Error estimates for binomial approximations of game options," Papers math/0702423, arXiv.org.
    5. Yuri Kifer, 2012. "Dynkin Games and Israeli Options," Papers 1209.1791, arXiv.org.
    6. Y. Iron & Y. Kifer, 2012. "Error estimates for binomial approximations of game put options," Papers 1206.0153, arXiv.org, revised Oct 2013.
    7. Filipović, Damir & Larsson, Martin & Pulido, Sergio, 2020. "Markov cubature rules for polynomial processes," Stochastic Processes and their Applications, Elsevier, vol. 130(4), pages 1947-1971.
    8. Damir Filipovi'c & Martin Larsson & Sergio Pulido, 2017. "Markov cubature rules for polynomial processes," Papers 1707.06849, arXiv.org, revised Jun 2019.

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