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Convergence from Discrete- to Continuous-Time Contingent Claims Prices

Hua He

University of California, Berkeley

Review of Financial Studies 1990 open access

This article generalizes the Cox, Ross, and Rubinstein (1979) binomial option-pricing model, and establishes a convergence from discrete-time multivariate multinomial models to continuous-time multidimensional diffusion models for contingent claims prices. The key to the approach is to approximate the N-dimensional diffusion price process by a sequence of N-variate, (N+1)-nomial processes. It is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous-time limits.

DOI
10.1093/rfs/3.4.523
Volume
3 (4)
Pages
523-546
Language
en
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