Convergence from discrete- to continuous-time contingent claims prices

This article generalizes the Cox, Ross, and Rubinstein (1979)binomial option-pricing model, and establishes a convergencefrom discrete-time multivariate multinomial models to continuous-timemultidimensional diffusion models for contingent claims prices.The key to the approach is to approximate the N-dimensionaldiffusion price process by a sequence of N-variate, (N+1)-nomialprocess. It is shown that contingent claims prices and dynamicreplicating portfolio strategies derived from the discrete timemodels converge to their corresponding continuous-time limits.