Multi-Purpose Binomial Model: Fitting all Moments to the Underlying Geometric Brownian Motion

Published 6 Dec 2016 in q-fin.PR | (1612.01979v1)

Abstract: We construct a binomial tree model fitting all moments to the approximated geometric Brownian motion. Our construction generalizes the classical Cox-Ross-Rubinstein, the Jarrow-Rudd, and the Tian binomial tree models. The new binomial model is used to resolve a discontinuity problem in option pricing.

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