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The multinomial option pricing model and its Brownian and Poisson limits |
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| Authors: | Madan, DB Milne, F Shefrin, H |
| Affiliation: | 1 College of Business and Management, University of Maryland, College Park, MD 20742, USA 2 Australian National University, Australia 3 Santa Clara University, Santa Clara, USA |
| Abstract: | The Cox, Ross, and Rubinstein binomial model is generalizedto the multinomial case. Limits are investigated and shown toyield the Black-Scholes formula in the case of continuous samplepaths for a wide variety of complete market structures. In thediscontinuous case of Merton-type formula is shown to result,provided jump probabilities are replaced by their correspondingArrow-Debreu prices. |
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