Achieving Smooth Asymptotics for the Prices of European Options in Binomial Trees
Mark S. Joshi
University of Melbourne - Centre for Actuarial Studies
September 2006
Abstract:
A new binomial approximation to the Black-Scholes model is introduced. It is shown that for digital options and vanilla European call and put options that a complete asymptotic expansion of the error in powers of 1/n exists. This is the first binomial tree for which such an asymptotic expansion has been shown to exist.
Number of Pages in PDF File: 15
Keywords: binomial trees, Richardson extrapolation, options, rate of convergence
JEL Classification: G13
working papers series
Suggested Citation
Joshi, Mark S., Achieving Smooth Asymptotics for the Prices of European Options in Binomial Trees (September 2006). Available at SSRN: http://ssrn.com/abstract=928186 or http://dx.doi.org/10.2139/ssrn.928186
