Pricing American options under the constant elasticity of variance model: An extension of the method by Barone-Adesi and Whaley

Ballestra, Luca Vincenzo; Cecere, Liliana

doi:10.1016/j.frl.2015.05.017

Cited by 8 publications

(3 citation statements)

References 26 publications

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“…6 For instance, Ballestra and Cecere (2015), Nunes (2009), and Ruas, Dias, and Nunes (2013) use the CEV model for pricing and hedging American-style options. Chung et al (2013aChung et al ( , 2013b, Dias, Nunes, and Ruas (2015), Nunes et al (2015), and Tsai (2014) use the CEV model for pricing and hedging barrier options.…”

Section: Static Replication Methods Under the Cev Modelmentioning

confidence: 99%

Repeated Richardson extrapolation and static hedging of barrier options under the CEV model

Guo

Chang

2020

Journal of Futures Markets

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This paper proposes an accelerated static replication approach for continuous European-style barrier options by employing the repeated Richardson extrapolation technique with the Romberg sequence. This approach is developed under the constant elasticity of variance (CEV) model of Cox (1975) and Cox and Ross (1976) using the framework offered by Derman, Ergener, and Kani (1995; DEK) and its modified method of Chung et al. (2010, 2013a, 2013b) andTsai (2014). The numerical results indicate that our method could significantly reduce replication errors for European knock-out call options and may be superior to the imposition of the theta-matching condition on the DEK method.

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Section: Static Replication Methods Under the Cev Modelmentioning

confidence: 99%

Repeated Richardson extrapolation and static hedging of barrier options under the CEV model

Guo

Chang

2020

Journal of Futures Markets

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“…It has been introduced into annuity contracts, and the optimal investment strategies in the utility framework are investigated by applying a dynamic programming principle. Literature surveys witness that there are few studies [14][15][16][17][18][19][20][21][22] available in which the solutions of the CEV models have been found. However, the exact solutions of the CEV model to an optimal investment-consumption problem have not been reported in the existing literature, which is the main focus of this particular study.…”

Section: Introductionmentioning

confidence: 99%

Invariant approach to optimal investment–consumption problem: the constant elasticity of variance (CEV) model

Bakkaloglu

Aziz

Fatima

et al. 2016

Math Methods in App Sciences

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Communicated by G. FranssensThe optimal investment-consumption problem under the constant elasticity of variance (CEV) model is solved using the invariant approach. Firstly, the invariance criteria for scalar linear second-order parabolic partial differential equations in two independent variables are reviewed. The criteria is then employed to reduce the CEV model to one of the four Lie canonical forms. It is found that the invariance criteria help in transforming the original equation to the second Lie canonical form and with a proper parameter selection; the required transformation converts the original equation to the first Lie canonical form that is the heat equation. As a consequence, we find some new classes of closed-form solutions of the CEV model for the case of reduction into heat equation and also into second Lie canonical form. The closed-form analytical solution of the Cauchy initial value problems for the CEV model under investigation is also obtained. Copyright

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“…The importance of the CEV model for traders is justified by its ability to accommodate two empirical stylized facts commonly observed in options markets, namely: the existence of an inverse relation between stock returns and realized volatility ( leverage effect ), as highlighted, for instance, by Bekaert and Wu () and Black (); and the negative correlation between the implied volatility and the strike price of an option contract ( implied volatility skew ), as documented, for example, in Dennis and Mayhew (). Therefore, it is with no surprise that the CEV model is still widely used nowadays in a variety of contexts, for example, by Ballestra and Cecere (), Chung and Shih (), Nunes (), and Ruas, Dias, and Nunes () for pricing and hedging plain‐vanilla American‐style options, or by Chung, Shih, and Tsai (,), Dias, Nunes, and Ruas (), Nunes, Ruas, and Dias (), and Tsai () in the case of barrier option contracts, just to mention a few.…”

Section: Introductionmentioning

confidence: 99%

The Binomial CEV Model and the Greeks

Cruz

Dias

2016

Journal of Futures Markets

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This article compares alternative binomial approximation schemes for computing the option hedge ratios studied by Chung and Shackleton (2002), Chung, Hung, Lee, and Shih (2011), and Pelsser and Vorst (1994) under the lognormal assumption, but now considering the constant elasticity of variance (CEV) process proposed by Cox (1975) and using the continuous‐time analytical Greeks recently offered by Larguinho, Dias, and Braumann (2013) as the benchmarks. Among all the binomial models considered in this study, we conclude that an extended tree binomial CEV model with the smooth and monotonic convergence property is the most efficient method for computing Greeks under the CEV diffusion process because one can apply the two‐point extrapolation formula suggested by Chung et al. (2011). © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:90–104, 2017

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Pricing American options under the constant elasticity of variance model: An extension of the method by Barone-Adesi and Whaley

Cited by 8 publications

References 26 publications

Repeated Richardson extrapolation and static hedging of barrier options under the CEV model

Repeated Richardson extrapolation and static hedging of barrier options under the CEV model

Invariant approach to optimal investment–consumption problem: the constant elasticity of variance (CEV) model

The Binomial CEV Model and the Greeks

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