A GENERALIZED BINOMIAL MODEL AND OPTION PRICING
FORMULAE FOR SUBORDINATED STOCK-PRICE PROCESSES
Rajeeva L. Karandikar
Svetlozar T. Rachev
Abstract: The first half of the paper is intended as a short survey on discrete- and
continuous-time option pricing. In the second part, we develop new concepts and derive new
results for option valuations within a generalized binomial model with random upturns and
downturns, characterizing the equivalent portfolio, the trading strategy, and the call option
valuation. Motivated by the Mandelbrot-Taylor Paretian stable model for stock returns we
apply the generalized binomial model to obtain - in the limit - call valuation formulae for
subordinated stock-price processes.
2000 AMS Mathematics Subject Classification: Primary: -; Secondary: -;
Key words and phrases: -