Binomial Approximations of Singular Diffusions in Financial Models

International Journal of Financial Engineering, pp. 443-465, December 1993

26 Pages Posted: 20 Oct 2006

Abstract

This paper proposes a binomial approximation of diffusions with various boundary characteristics: natural, entrance, regular, and exit. The singular diffusion approximation (SDA) method is applied to the Ornstein-Uhlenbeck process and the square-root process used in Cox, Ingersoll, and Ross (1985) for interest rates. Numerical examples show that the proposed approximation is more accurate and efficient than existing binomial models.

Keywords: Binomial Models, Singular Diffusions, Weak Convergence, Term Structure of Interest Rate

JEL Classification: G13

Suggested Citation

Li, Anlong, Binomial Approximations of Singular Diffusions in Financial Models. International Journal of Financial Engineering, pp. 443-465, December 1993, Available at SSRN: https://ssrn.com/abstract=938820

Anlong Li (Contact Author)

Hull Tactical Funds ( email )

141 W. Jackson Street #1650
Chicago, IL 60604
United States

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