Convergence of Discrete Time Option Pricing Models Under Stochastic Interest Rates

Posted: 9 Dec 1999

See all articles by Jean-Luc Prigent

Jean-Luc Prigent

University of Cergy-Pontoise - ThEMA

Jean-Luc Prigent

University of Cergy-Pontoise - THEMA

Olivier Scaillet

Catholic University of Louvain (UCL)

Abstract

We analyze the joint convergence of sequences of discounted stock prices and Radon-Nicodym derivatives of the minimal martingale measure when interest rates are stochastic. Therefrom we deduce the convergence of option values in either complete or incomplete markets. We illustrate the general result by two main examples: a discrete time i.i.d. approximation of a Merton type pricing model for options on stocks and the trinomial tree of Hull and White for interest rate derivatives.

JEL Classification: D52, E43, G13

Suggested Citation

Prigent, Jean-Luc and Prigent, Jean-Luc and Scaillet, Olivier, Convergence of Discrete Time Option Pricing Models Under Stochastic Interest Rates. Available at SSRN: https://ssrn.com/abstract=191611

Jean-Luc Prigent (Contact Author)

University of Cergy-Pontoise - ThEMA ( email )

33 boulevard du port
33 bd du Port
F-95011 Cergy CEDEX
France

Jean-Luc Prigent

University of Cergy-Pontoise - THEMA ( email )

Olivier Scaillet

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Institut d'Administration et de Gestion and Departement des Sciences Economiques
B-1348 Louvain-la-Neuve
Belgium
Not available (Phone)
Not available (Fax)

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