Modeling and pricing with a random walk in random environment

Isabel Castro () and Carlos G. Pacheco
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Isabel Castro: Departamento de Matemáticas, CINVESTAV-IPN. A. Postal 14-740, Ciudad de México 07360, México
Carlos G. Pacheco: Departamento de Matemáticas, CINVESTAV-IPN. A. Postal 14-740, Ciudad de México 07360, México

International Journal of Financial Engineering (IJFE), 2020, vol. 07, issue 04, 1-20

Abstract: We propose a parsimonious model for financial pricing that incorporates the existence of a random environment; such construction can be though as an extension of the Cox–Ross–Rubinstein (CRR) model. Our model is motivated from the Sinai random walk, but we mention the difficulty of applying such model if we try to use it with the CRR procedure. As it was done with Sinai’s walk, we provide a method to connect the most visited sites of the model with the minimum points of a function of the environment. We present some simulations and a numerical experiment to bring a new perspective.

Keywords: Cox–Ross–Rubinstein methodology; Sinai’s walk; random environment model (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S242478632050053X

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