Convergence of discrete time option pricing models under stochastic interest rates

Olivier Scaillet, Jean-Luc Prigent and J.-P. Lesne ()
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J.-P. Lesne: THEMA, Université de Cergy-Pontoise, 33 bd du Port, F-95011 Cergy-Pontoise, France

Finance and Stochastics, 2000, vol. 4, issue 1, 93 pages

Abstract: We analyze the joint convergence of sequences of discounted stock prices and Radon-Nicodym derivatives of the minimal martingale measure when interest rates are stochastic. Therefrom we deduce the convergence of option values in either complete or incomplete markets. We illustrate the general result by two main examples: a discrete time i.i.d. approximation of a Merton type pricing model for options on stocks and the trinomial tree of Hull and White for interest rate derivatives.

Keywords: Weak convergence; incomplete market; option pricing; minimal martingale measure; stochastic interest rate; trinomial tree (search for similar items in EconPapers)
JEL-codes: D52 E43 G13 (search for similar items in EconPapers)
Date: 1999-10-29
Note: received: January 1998; final version received: February 1999 received: January 1998; final version received: February 1999
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Related works:
Working Paper: Convergence of discrete time option pricing models under stochastic interest rates (2000)
Working Paper: Convergence of Discrete Time Option Pricing Models Under Stochastic Interest Rates (1998)
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