Achieving Smooth Asymptotics for the Prices of European Options in Binomial Trees
15 Pages Posted: 5 Sep 2006 Last revised: 14 Feb 2008
Date Written: September 2006
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.
Keywords: binomial trees, Richardson extrapolation, options, rate of convergence
JEL Classification: G13
Suggested Citation: Suggested Citation