Option pricing under a normal mixture distribution derived from the Markov tree model

► We model European call options without assuming the underlying's returns are IID. ► The non-IID model gives rise to a recombinant tree with non-trivial properties. ► A mixture of normals closely approximates the distribution generated by the tree. ► We develop a closed-form option price and methods to estimate model parameters. ► In empirical tests, the non-IID model matches the market better than Black-Scholes.