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A Diffusion Limit for Generalized Correlated Random Walks
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- Journal:
- Journal of Applied Probability / Volume 43 / Issue 1 / March 2006
- Published online by Cambridge University Press:
- 14 July 2016, pp. 60-73
- Print publication:
- March 2006
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- Article
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A generalized correlated random walk is a process of partial sums
such that (X, Y) forms a Markov chain. For a sequence (X n ) of such processes in which each 
takes only two values, we prove weak convergence to a diffusion process whose generator is explicitly described in terms of the limiting behaviour of the transition probabilities for the Y n . Applications include asymptotics of option replication under transaction costs and approximation of a given diffusion by regular recombining binomial trees.
such that (
takes only two values, we prove weak convergence to a diffusion process whose generator is explicitly described in terms of the limiting behaviour of the transition probabilities for the Hedging contingent claims for a large investor in an incomplete market
- Part of
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- Journal:
- Advances in Applied Probability / Volume 30 / Issue 1 / March 1998
- Published online by Cambridge University Press:
- 01 July 2016, pp. 239-255
- Print publication:
- March 1998
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