ISSN:
1573-7179
Keywords:
binomial option pricing
;
stochastic parameters
;
beta distribution
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract This research extends the binomial option-pricing model of Cox, Ross, and Rubinstein (1979) and Rendleman and Barter (1979) to the case where the up and down percentage changes of stock prices are stochastic. Assuming stochastic parameters in the discrete-time binomial option pricing is analogous to assuming stochastic volatility in the continuous-time option pricing. By assuming that the up and down parameters are independent random variables following beta distributions, we are able to derive a closed-form solution to this stochastic discrete-time option pricing. We also derive an upper and a lower bounds of the option price.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF02408402
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