On Simple Binomial Approximations for Two Variable Functions in Finance Applications

Hemantha S. B. Herath and Pranesh Kumar
Additional contact information
Hemantha S. B. Herath: Department of Accounting, Brock University, Faculty of Business, Taro Hall 240, 500 Glenridge Ave, St. Catharines,Ontario, Canada L2S 3A1, Canada
Pranesh Kumar: College of Science and Management, University of Northern British Columbia, 3333 University Way, Prince George, British Columbia, Canada V2N 4Z9, Canada

Chapter 8 in Advances in Quantitative Analysis of Finance and Accounting, 2007, pp 163-179 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe extend the volatility stabilization transformation technique to two correlated Brownian motions. This technique allows to construct a computationally simple binomial tree and to obtain the probabilities for the up and down movements. We derive the expressions for correlated geometric Brownian motions by considering two variable functions. We discuss particular functions of two variables, which are commonly employed in finance. Further, we simulate results for the numerical accuracy of the approximations using an exchange option.

Keywords: Monte Carlo Simulations; REIT; IPO; Fractional Integration; Seasonality; Long Memory; Macroeconomic Shocks; VAR; Interest Rates (search for similar items in EconPapers)
Date: 2007
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789812772213_0008 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789812772213_0008 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789812772213_0008

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().