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: 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
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