Achieving smooth asymptotics for the prices of European options in binomial trees |
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| Authors: | Mark S Joshi |
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| Institution: | 1. Centre for Actuarial Studies, Department of Economics , University of Melbourne , Victoria, 3010, Australia mark@markjoshi.com |
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| Abstract: | 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, a complete asymptotic expansion of the error in powers of n ?1 exists. This is the first binomial tree for which an asymptotic expansion has been shown to exist. |
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| Keywords: | Binomial trees Richardson extrapolation Options Rate of convergence |
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