A binomial tree to price European options

Brogi, Athos (2010): A binomial tree to price European options. Published in: PHD Theses in Statistics and Applications: book of short papers , Vol. 1, No. 1 (February 2010): pp. 111-116.

Abstract

A time-changing volatility binomial tree to price European options is presented followed by an algorithm explaining how to implement the tree. Finally, the advantages of the model are listed and a simulation is carried out showing that the distribution of prices simulated along the tree is skewed and leptokurtic.

• Item Type: MPRA Paper
• Language: English
• Keywords: Arbitrage; kurtosis; martingale; option; risk-neutral; skewness; volatility
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General

References

Black F. (1976) Studies of Stock Price Volatility Changes, Proceedings of the 1976 Meetings of the Business and Economics Statistics Section, American Statistical Association, 177-181.