The Multinomial Option Pricing Model and Its Brownian and Poisson Limits

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 a Merton-type formula is shown to result, provided jump probabilities are replaced by their corresponding Arrow-Debreu prices.

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Year of publication:	1990-01
Authors:	Milne, Frank ; Madan, Dilip ; Shefrin, Hersh
Institutions:	Economics Department, Queen's University
Subject:	Multinomial \| option \| pricing \| Brownian \| Poisson

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Extent:	application/pdf
Series:	Working Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	Published in The Review of Financial Studies, 1989 Volume 2, Number 2, pp. 251-265 Number 1162 15 pages
Classification:	G12 - Asset Pricing ; G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

Persistent link: https://ebvufind01.dmz1.zbw.eu/10005688432