Rate of convergence of binomial formula for option pricing

Yuttana Ratibenyakool and Kritsana Neammanee

Communications in Statistics - Theory and Methods, 2020, vol. 49, issue 14, 3537-3556

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 1nn. 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.

Date: 2020
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DOI: 10.1080/03610926.2019.1590600

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