← Search

Review of Financial Studies Vol. 2 No. 2 1989

The Multinomial Option Pricing Model and Its Brownian and Poisson Limits

Dilip B. Madan1; Frank Milne2; Hersh Shefrin3

1 University of Maryland, College Park · 2 Australian National University · 3 Santa Clara University

Abstract

The Cox, Ross, and Rubinstein binomial model is generalized to the multinomial case. Limits are investigated and shown to yield the Black-Scholes formula in the case of continuous sample paths for a wide variety of complete market structures. In the discontinuous case of Merton-type formula is shown to result, provided jump probabilities are replaced by their corresponding Arrow-Debreu prices.

DOI
10.1093/rfs/2.2.251
Volume
2
Issue
2
Pages
251-265
Language
en
Sources
openalex crossref

Cite