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The Differential Algorithm for American Put Option with Transaction Costs under CEV Model

Author

Listed:
  • Yin Zhao
  • Tan Chang

    (School of Statistics and Mathematics, Central University of Finance and Economics, Beijing100081, China)

Abstract

This paper mainly studies the American put option pricing with transaction costs in the CEV process. The specific Crank-Nicolson form of numerical solution is obtained by the finite difference method. On this basis, Hong Kong stock CKH option is selected as the object to estimate option price. Finally, by comparing with the actual price, the American put option pricing model is verified as reasonable. This paper is significant to the rational pricing and the institutional construction of the upcoming stock options in mainland China.

Suggested Citation

  • Yin Zhao & Tan Chang, 2014. "The Differential Algorithm for American Put Option with Transaction Costs under CEV Model," Journal of Systems Science and Information, De Gruyter, vol. 2(5), pages 401-410, October.
    • Handle: RePEc:bpj:jossai:v:2:y:2014:i:5:p:401-410:n:2
    DOI: 10.1515/JSSI-2014-0401
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    References listed on IDEAS

    as
    1. Monoyios, Michael, 2004. "Option pricing with transaction costs using a Markov chain approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 28(5), pages 889-913, February.
    2. Clewlow, Les & Hodges, Stewart, 1997. "Optimal delta-hedging under transactions costs," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1353-1376, June.
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    Citations

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    Cited by:

    1. Ballestra, Luca Vincenzo & Cecere, Liliana, 2015. "Pricing American options under the constant elasticity of variance model: An extension of the method by Barone-Adesi and Whaley," Finance Research Letters, Elsevier, vol. 14(C), pages 45-55.
    2. Ballestra, Luca Vincenzo & Cecere, Liliana, 2016. "A numerical method to estimate the parameters of the CEV model implied by American option prices: Evidence from NYSE," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 100-106.

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