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Error estimates for the binomial approximation of American put options

Abstract : We establish some error estimates for the binomial approximation of American put prices in the Black-Scholes model. Namely, we prove that if P is the American put price and P-n its n-step binomial approximation, there exist positive constants c and C such that -c/n(2/3) less than or equal to P-n-P less than or equal to C/n(3/4). With an additional assumption on the interest rate and the volatility, a better upper bound is derived.
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https://hal-upec-upem.archives-ouvertes.fr/hal-00694268
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Submitted on : Thursday, May 3, 2012 - 11:44:55 PM
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  • HAL Id : hal-00694268, version 1

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Damien Lamberton. Error estimates for the binomial approximation of American put options. Annals of Applied Probability, Institute of Mathematical Statistics (IMS), 1998, 8 (1), pp.206--233. ⟨hal-00694268⟩

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