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Rev Fin 1990; 3:523-546
© 1990 the Society for Financial Studies

Article

Convergence from discrete- to continuous-time contingent claims prices

H He
University of California, Berkeley, CA 94720, USA

Abstract

This article generalizes the Cox, Ross, and Rubinstein (1979) binomial option-pricing model, and establishes a convergence from discrete-time multivariate multinomial models to continuous-time multidimensional diffusion models for contingent claims prices. The key to the approach is to approximate the N-dimensional diffusion price process by a sequence of N-variate, (N+1)-nomial process. It is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous-time limits.


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