Generalized Cox-Ross-Rubinstein Binomial Models

San-Lin Chung () and Pai-Ta Shih ()
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San-Lin Chung: Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Taipei 10617, Taiwan
Pai-Ta Shih: Department of Economics, National Dong-Hwa University, No. 1, Sec. 2, Da Hsueh Road, Shoufeng, Hualien 97401, Taiwan

Management Science, 2007, vol. 53, issue 3, 508-520

Abstract: This paper generalizes the seminal Cox-Ross-Rubinstein (CRR) binomial model by adding a stretch parameter. The generalized CRR (GCRR) model allows us to fine-tune (via the stretch parameter) the lattice structure so as to efficiently price a range of options, such as barrier options. Our analysis provides insights into the fine structure of convergence of the general binomial model to the Black-Scholes formula. We also discuss how to improve the rate of convergence or the oscillatory behavior of the GCRR model. The numerical results suggest that the GCRR models with various modifications are efficient for pricing a range of options.

Keywords: binomial model; rate of convergence; monotonic convergence; trinomial model; barrier option; smooth convergence (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:53:y:2007:i:3:p:508-520

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