×

zbMATH — the first resource for mathematics

Constant elasticity of variance option pricing model with time-dependent parameters. (English) Zbl 1006.91050
The authors start with the observation that both theoretical arguments and empirical data imply a strong negative correlation between a stock price and the volatility of its percentage change. This leads them to the study of various constant elasticity of variance (CEV) models with time-dependent parameters. Explicite pricing formulas for various CEV processes with different elasticity factors are provided. The numerical results indicate that option values are sensitive to the volatility of the term structure. The proposed Lie-algebraic approach, used for the first time in the literature in this context, appears to be quite simple and easily extendable to other option pricing models with well defined algebraic structures.

MSC:
91G20 Derivative securities (option pricing, hedging, etc.)
PDF BibTeX XML Cite
Full Text: DOI
References:
[1] DOI: 10.2307/2327490 · doi:10.2307/2327490
[2] DOI: 10.1086/260062 · Zbl 1092.91524 · doi:10.1086/260062
[3] DOI: 10.1016/0304-405X(82)90018-6 · doi:10.1016/0304-405X(82)90018-6
[4] DOI: 10.1016/0304-405X(76)90023-4 · doi:10.1016/0304-405X(76)90023-4
[5] DOI: 10.1016/0304-405X(91)90011-8 · doi:10.1016/0304-405X(91)90011-8
[6] DOI: 10.3905/jod.1996.407970 · doi:10.3905/jod.1996.407970
[7] DOI: 10.2307/2328720 · doi:10.2307/2328720
[8] Lo C. F., Physical Review 47 pp 115–
[9] DOI: 10.1209/0295-5075/24/5/001 · doi:10.1209/0295-5075/24/5/001
[10] DOI: 10.1209/0295-5075/32/3/001 · doi:10.1209/0295-5075/32/3/001
[11] DOI: 10.1209/epl/i1997-00345-2 · doi:10.1209/epl/i1997-00345-2
[12] Lo C. F., Physics Letters 246 pp 66–
[13] Lo C. F., Physica 262 pp 153–
[14] DOI: 10.1016/S0375-9601(97)00212-0 · Zbl 1052.81537 · doi:10.1016/S0375-9601(97)00212-0
[15] DOI: 10.2307/2326355 · doi:10.2307/2326355
[16] DOI: 10.2307/2328285 · doi:10.2307/2328285
[17] DOI: 10.1063/1.1703993 · Zbl 0133.34202 · doi:10.1063/1.1703993
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.