The binomial model and risk neutrality: Some important details

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Abstract
  • This paper reexamines the relationship between investors' preferences and the binomial option pricing model of Cox, Ross, and Rubinstein (CRR). It is shown that the independence of the binomial option pricing model from investors' preferences is a result of a special choice of binomial parameters made by CRR. For a more general choice of binomial parameters, risk neutrality cannot be obtained in discrete time. This analysis reveals the essential difference between the "risk neutral" valuation approach of Cox and Ross and the equivalent martingale approach of Harrison and Kreps in a discrete time framework.
TitleThe binomial model and risk neutrality: Some important details
CreatorChambers, Donald R.
Nawalkha, S. K.
PublisherFinancial Review
Academic DepartmentEconomics
DivisionSocial Sciences
OrganizationLafayette College
Date IssuedAugust 1995
Date Available2016-04-28T17:25:16Z
TypeArticle
LanguageEnglish
Bibliographic CitationNawalkha, S. K. and D. R. Chambers (1995 Aug) "The binomial model and risk neutrality: Some important details." Financial Review 30 (3): 605-15.
Standard IdentifierHandle 10385/2115
Permalinkhttp://hdl.handle.net/10385/2115
Rights Statement In Copyright In Copyright
Rights HoldersJohn Wiley & Sons, Ltd.
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File Chambers-FinancialReview-vol30-1995.pdf Uploaded 2019-10-20 Public Download

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