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Binomial approximation in financial models: computational simplicity and convergence

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  • Anlong Li

Abstract

An exploration of the potential of transformation and other schemes in approximating diffusions (including those with boundaries) commonly seen in financial models. Convergence results are established for valuing both European and American contingent claims.

Suggested Citation

  • Anlong Li, 1992. "Binomial approximation in financial models: computational simplicity and convergence," Working Papers (Old Series) 9201, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9201
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    References listed on IDEAS

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    1. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
    2. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
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    4. Nelson, Daniel B & Ramaswamy, Krishna, 1990. "Simple Binomial Processes as Diffusion Approximations in Financial Models," The Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 393-430.
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