(T > 0, n ∈ N) of the discrete-time price dynamics of a financial asset, when the hypothesis a special n-period binomial model and the alternative is a different n-period binomial model. As the observation gaps tend to zero (i. e. n → ∞), we obtain the limits of the corresponding Bayes risk as well as of the related Hellinger integrals and power divergences. Furthermore, we also give an example...

Binomial trees are very popular in both theory and applications of option pricing. As they often suffer from an irregular convergence behavior, improving this is an important task. We build upon a new version of the Edgeworth expansion for lattice models to construct new and quickly converging binomial schemes with a particular application to barrier options.

A general method to construct recombinant tree approximations for stochastic volatility models is developed and applied to the Heston model for stock price dynamics. In this application, the resulting approximation is a four tuple Markov process. The first two components are related to the stock and volatility processes and take values in a two-dimensional binomial tree. The other two component...

A new binomial approximation to the Black–Scholes model is introduced. It is shown that for digital options and vanilla European call and put options that a complete asymptotic expansion of the error in powers of n−1 exists. This is the first binomial tree for which such an asymptotic expansion has been shown to exist.

Using an approach similar to that of Gerber and Shiu (1998), a recursive formula is given for the expected discounted penalty due at ruin, in the discrete time risk model. With it the joint distribution of three random variables is obtained; time to ruin, the surplus just before ruin and the deficit at ruin. The time to ruin is analyzed through its probability generating function (p.g.f.). The ...

* We are grateful for helpful comments from Salih Neftci. The comments of an anonymous referee were enormously beneficial. We are grateful for support from the Schweger Fund. Remaining errors are our own.

The beta-binomial distribution is resulted when the probability of success per trial in the binomial distribution varies in successive trials and the mixing distribution is from the beta family. For experiments with binary outcomes, often it may happen that observations exhibit some extra binomial variation and occur in clusters. In such experiments the beta-binomial distribution can generally ...

In this paper we study the dependence on the loss function of the strategy which minimises the expected shortfall risk when dealing with a financial contingent claim in the particular situation of a binomial model. After having characterised the optimal strategies in the particular cases when the loss function is concave, linear or strictly convex, we analyse how optimal strategies change when ...