A generalized binomial model and option pricing formulae for subordinated stock-price processes

Karandikar, Rajeeva L. ; Rachev, Svetlozar T. (1995) A generalized binomial model and option pricing formulae for subordinated stock-price processes Probability and Mathematical Statistics, 15 . 427–447. ISSN 0208-4147

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Abstract

The first half of the paper is intended as a short survey on discrete- and continuous-time option pricing. In the second part, we develop new concepts and derive new results for option valuations within a generalized binomialmodelwith random upturns and downturns, characterizing the equivalent portfolio, the trading strategy, and the call option valuation. Motivated by the Mandelbrot-Taylor Paretian stable model for stock returns we apply the generalized binomial model to obtain - in the limit - call valuation formulae for subordinated stock-price processes.

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