Binomial option pricing with nonidentically distributed returns and its implications
The argument of Cox, Ross, and Rubinstein for pricing options is generalized in the direction of using nonidentically distributed binomial returns as a model for the stock price process. It is found that the use of nonidentically distributes binomial returns, in the limit exhaust the class of infinitely divisible distributions. The pricing of these models are considered and it is shown that the model is a generalization of the Black-Scholes model. The use, however, of nonidentically distributed returns, it is shown, can lead to contradictions. hence, it is argued, the models used for stock price behavior requires restrictions. (C) 1999 Published by Elsevier Science Ltd. All rights reserved.
option pricing binomial distribution