Multivariate Binomial Approximations for Asset Prices with Non-Stationary Variance and Covariance Characteristics

39 Pages Posted: 11 Nov 2008

See all articles by Teng-Suan Ho

Teng-Suan Ho

affiliation not provided to SSRN

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business; NYU Shanghai

Date Written: 1994

Abstract

In this paper, we suggest an efficient method of approximating a general, multivariate lognormal distribution by a multivariate binomial process. There are two important features of such multivariate distributions. First, the state variables may have volatilities that change over time. Second, the two or more relevant state variables involved may covary with each other in a specified manner, with a time-varying covariance structure. We discuss the asymptotic properties of the resulting processes and show how the methodology can be used to value a complex, multiple-exercisable option whose payoff depends on the prices of two assets.

Suggested Citation

Ho, Teng-Suan and Stapleton, Richard C. and Subrahmanyam, Marti G., Multivariate Binomial Approximations for Asset Prices with Non-Stationary Variance and Covariance Characteristics (1994). NYU Working Paper No. FIN-94-036, Available at SSRN: https://ssrn.com/abstract=1299466

Teng-Suan Ho (Contact Author)

affiliation not provided to SSRN

No Address Available

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 1524 381 172 (Phone)
+44 1524 846874 (Fax)

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

NYU Shanghai ( email )

1555 Century Ave
Shanghai, 200122
China

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