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Can High-Order Convergence of European Option Prices be Achieved with Common CRR-Type Binomial Trees?

Can High-Order Convergence of European Option Prices be Achieved with Common CRR-Type Binomial... Considering European call options, we prove that CRR-type binomial trees systematically underprice the value of these options, when the spot price is not near the money. However, we show that, with a volatility premium to compensate this mispricing, any arbitrarily high order of convergence can be achieved, within the common CRR-type binomial tree framework. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Bulletin of the Malaysian Mathematical Sciences Society Springer Journals

Can High-Order Convergence of European Option Prices be Achieved with Common CRR-Type Binomial Trees?

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References (28)

Publisher
Springer Journals
Copyright
Copyright © 2015 by Malaysian Mathematical Sciences Society and Universiti Sains Malaysia
Subject
Mathematics; Mathematics, general; Applications of Mathematics
ISSN
0126-6705
eISSN
2180-4206
DOI
10.1007/s40840-015-0221-2
Publisher site
See Article on Publisher Site

Abstract

Considering European call options, we prove that CRR-type binomial trees systematically underprice the value of these options, when the spot price is not near the money. However, we show that, with a volatility premium to compensate this mispricing, any arbitrarily high order of convergence can be achieved, within the common CRR-type binomial tree framework.

Journal

Bulletin of the Malaysian Mathematical Sciences SocietySpringer Journals

Published: Sep 15, 2015

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