Random dynamics and finance: constructing implied binomial trees from a predetermined stationary density

Wael Bahsoun, Paweł Góra, Silvia Mayoral and Manuel Morales

Applied Stochastic Models in Business and Industry, 2007, vol. 23, issue 3, 181-212

Abstract: We introduce a general binomial model for asset prices based on the concept of random maps. The asymptotic stationary distribution for such model is studied using techniques from dynamical systems. In particular, we present a technique to construct a general binomial model with a predetermined stationary distribution. This technique is independent of the chosen distribution making our model potentially useful in financial applications. We briefly explore the suitability of our construction as an implied binomial tree. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2007
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https://doi.org/10.1002/asmb.663

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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:23:y:2007:i:3:p:181-212

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