CONVERGENCE OF AMERICAN OPTION VALUES FROM DISCRETE- TO CONTINUOUS-TIME FINANCIAL MODELS

Given a sequence of discrete-time option valuation models in which the sequence of processes defining the state variables converges weakly to a diffusion, we prove that the sequence of American option values obtained from these discrete-time models also converges to the corresponding value obtained from the continuous-time model for the standard models in the finance/economics literature. the convergence proof carries over to the case when the limiting risky asset price process follows a diffusion, except it pays discrete dividends on some fixed dates. Copyright 1994 Blackwell Publishers.