Rate of convergence of binomial formula for option pricing. Issue 14 (17th July 2020)

• Record Type: Journal Article
• Authors: Ratibenyakool, Yuttana; Neammanee, Kritsana
• Is Part Of: Communications in statistics. Volume 49:Issue 14(2020)
• Page Start: 3537
• Page End: 3556
• Publication Date: 2020-07-17
• Subjects: Binomial model -- black–schole model -- option pricing; 62P05; Mathematical statistics -- Periodicals; Mathematics; Statistics; 519.2
• DOI: 10.1080/03610926.2019.1590600
• Languages: English
• ISSNs: 0361-0926

Abstract

Abstract: The Binomial and Black–Scholes formulas are tools for valuating a call option at any specified time. We have already known that the Binomial formula converges to the Black–Scholes formula as the number of periods ( n ) converges to infinity. This research obtains the rate of this convergence, namely 1 n n . Our rate of convergence is better than those obtained by Cox, Ross, and Rubinstein (1979 ), Leisen and Reimer (1996 ), Heston and Zhon (2000), Diener and Diener (2004 ) and Chang and Palmer (2007 ). We also provide the explicit constant of the bound of this convergence.