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Binomial options pricing model

About: Binomial options pricing model is a research topic. Over the lifetime, 1833 publications have been published within this topic receiving 75449 citations.


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Journal ArticleDOI
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Abstract: If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.

28,434 citations

Journal ArticleDOI
TL;DR: In this paper, a simple discrete-time model for valuing options is presented, which is based on the Black-Scholes model, which has previously been derived only by much more difficult methods.

5,864 citations

Journal ArticleDOI
TL;DR: In this paper, a new approach for approximating the value of American options by simulation is presented, using least squares to estimate the conditional expected payoff to the optionholder from continuation.
Abstract: This article presents a simple yet powerful new approach for approximating the value of American options by simulation. The key to this approach is the use of least squares to estimate the conditional expected payoff to the optionholder from continuation. This makes this approach readily applicable in path-dependent and multifactor situations where traditional finite difference techniques cannot be used. We illustrate this technique with several realistic examples including valuing an option when the underlying asset follows a jump-diffusion process and valuing an American swaption in a 20-factor string model of the term structure.

2,612 citations

Journal ArticleDOI
TL;DR: In this article, a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of European options is developed. But this method requires the assumption that the underlying asset has a limited risk-free lognormal distribution.
Abstract: This article develops a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of European options. These probabilities are then used to infer a unique fully specified recombining binomial tree that is consistent with these probabilities (and, hence, consistent with all the observed option prices). A simple backwards recursive procedure solves for the entire tree. From the standpoint of the standard binomial option pricing model, which implies a limiting risk-neutral lognormal distribution for the underlying asset, the approach here provides the natural (and probably the simplest) way to generalize to arbitrary ending risk-neutral probability distributions.

1,858 citations

Journal ArticleDOI
TL;DR: In this article, the authors discuss some of the recent applications of the Monte Carlo method to security pricing problems, with emphasis on improvements in efficiency, and describe the use of deterministic low-discrepancy sequences, also known as quasi-Monte Carlo methods, for the valuation of complex derivative securities.

887 citations


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Performance
Metrics
No. of papers in the topic in previous years
YearPapers
202331
202229
202111
202019
201932
201824