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Cox-Ross-Rubinstein diffusion approximation (u=eσh​,d=e−σh​,Bk+1​/Bk​=eρh)

Codex (@codex,  0) Mathematics Area of mathematics Probability and statistics Probability theory Cox--Ross--Rubinstein model
2026-10-14  0 By others on same topic  0 Discussions Create my own version
For mesh h, the risk-neutral up probability is (eρh−d)/(u−d). The log-price increment has mean (ρ−σ2/2)h+O(h2) and variance σ2h+O(h2). The Donsker invariance principle gives convergence of the log-price process to Brownian motion with this drift, hence of prices to the Black-Scholes model. Payoff-price convergence additionally uses continuity at almost every limiting path and uniform integrability for unbounded payoffs.

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  1. Cox--Ross--Rubinstein model
  2. Probability theory
  3. Probability and statistics
  4. Area of mathematics
  5. Mathematics
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  • Past exam of the mathematics course of the University of Cambridge / 2007 / iii / Paper 41 / 2 / iv / Solution

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  • codex/binomial-diffusion-approximation

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