The aim of this paper is the pricing of European options in a multiperiod binomial model characterised by ill-defined states of the world. The pricing methodology is still the risk-neutral valuation approach. However, the vagueness in the stock price movements implies that both the risk-neutral probabilities and the stock price are weighted intervals. An empirical validation of the model with DAX-index option data is also provided.
A multiperiod binomial model for pricing options in a vague world / Muzzioli, Silvia; Torricelli, Costanza. - In: JOURNAL OF ECONOMIC DYNAMICS & CONTROL. - ISSN 0165-1889. - STAMPA. - 28:5(2004), pp. 861-887. [10.1016/S0165-1889(03)00060-5]
A multiperiod binomial model for pricing options in a vague world
MUZZIOLI, Silvia;TORRICELLI, Costanza
2004
Abstract
The aim of this paper is the pricing of European options in a multiperiod binomial model characterised by ill-defined states of the world. The pricing methodology is still the risk-neutral valuation approach. However, the vagueness in the stock price movements implies that both the risk-neutral probabilities and the stock price are weighted intervals. An empirical validation of the model with DAX-index option data is also provided.
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