The Random-Time Binomial Model

34 Pages Posted: 10 Dec 1997

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Date Written: August 1997

Abstract

In this paper we study a binomial model with random time steps and explain how to calculate values for European and American call and put options. We prove weak convergence of the discrete processes to the Black{Scholes setup as well as convergence of the values for European and American put options. Computational experiments exhibit a smooth convergence structure and suggest that we can obtain an order of convergence of two via an extrapolation procedure. Approximations to jump {diffusions are straightforward.

JEL Classification: G13

Suggested Citation

Leisen, Dietmar P. J., The Random-Time Binomial Model (August 1997). Available at SSRN: https://ssrn.com/abstract=45926 or http://dx.doi.org/10.2139/ssrn.45926

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

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