A Symmetrical Binomial Lattice Approach, for Modeling Generic One Factor Markov Processes
نویسنده
چکیده
In this paper we propose a Symmetrical Binomial Lattice Approach that is equivalent to the well‐known and widely utilized Lattice of Cox, Ross & Rubinstein (1979) when modeling Geometric Brownian Motion type of processes, but can be utilized for a wide variety of other Markov style stochastic processes. This is due to the highly intuitive construction in which first the expected value expression of the process is directly used and the variance is modeled in a symmetrical lattice, which is added to the first. We then demonstrate its applicability with several Real Options examples, comparing to the Cox model.
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