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Closed-form formula for conditional moments of generalized nonlinear drift CEV process

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  • Sutthimat, Phiraphat
  • Mekchay, Khamron
  • Rujivan, Sanae

Abstract

This paper studied a generalized case of the constant elasticity of variance diffusion (CEV) process whereas the drift term is substantially nonlinear in the short rate. Well-known instances deduced by this process are the extended Cox–Ingersoll–Ross (ECIR) process and the extended inverse Feller (EIF) process or 3/2-stochastic volatility model (SVM). We found particular sufficient conditions of existence and uniqueness of a positive pathwise strong solution for time-dependent parameter functions, and obtained closed-form formulas for conditional moments based on Feynman–Kac theorem. The accuracy and validity of the formulas were further investigated based on Monte Carlo simulations.

Suggested Citation

  • Sutthimat, Phiraphat & Mekchay, Khamron & Rujivan, Sanae, 2022. "Closed-form formula for conditional moments of generalized nonlinear drift CEV process," Applied Mathematics and Computation, Elsevier, vol. 428(C).
    • Handle: RePEc:eee:apmaco:v:428:y:2022:i:c:s0096300322002879
    DOI: 10.1016/j.amc.2022.127213
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