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- Title
Option Pricing Using a Skew Random Walk Binary Tree.
- Authors
Hu, Yuan; Lindquist, W. Brent; Rachev, Svetlozar T.; Fabozzi, Frank J.
- Abstract
We develop a binary tree pricing model with underlying asset price dynamics following Itô–McKean skew Brownian motion. Our work was motivated by the Corns–Satchell, continuous-time, option pricing model. However, the Corns–Satchell market model is incomplete, while our discrete-time market model is defined in the natural world, extended to the risk-neutral world under the no-arbitrage condition where derivatives are priced under uniquely determined risk-neutral probabilities, and is complete. The skewness introduced in the natural world is preserved in the risk-neutral world. Furthermore, we show that the model preserves skewness under the continuous-time limit. We provide empirical applications of our model to the valuation of European put and call options on exchange-traded funds tracking the S&P Global 1200 index.
- Subjects
STANDARD &; Poor's Financial Services LLC; RANDOM walks; ARBITRAGE; RISK premiums; PRICES; OPTIONS (Finance); BROWNIAN motion; EXCHANGE traded funds
- Publication
Journal of Risk & Financial Management, 2024, Vol 17, Issue 4, p138
- ISSN
1911-8066
- Publication type
Article
- DOI
10.3390/jrfm17040138