The Multinomial Option Pricing Model and Its Brownian and Poisson Limits
- 1 April 1989
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 2 (2) , 251-265
- https://doi.org/10.1093/rfs/2.2.251
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.All Related Versions
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