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Keywords:

  • implied binomial trees;
  • random map;
  • binomial model;
  • Perron–Frobenius operator

Abstract

We introduce a general binomial model for asset prices based on the concept of random maps. The asymptotic stationary distribution for such model is studied using techniques from dynamical systems. In particular, we present a technique to construct a general binomial model with a predetermined stationary distribution. This technique is independent of the chosen distribution making our model potentially useful in financial applications. We briefly explore the suitability of our construction as an implied binomial tree. Copyright © 2006 John Wiley & Sons, Ltd.