Advanced Search
MyIDEAS: Login to save this article or follow this journal

Valuation of Standard Options under the Constant Elasticity of Variance Model

Contents:

Author Info

  • Richard Lu

    (Department of Insurance, Feng Chia University, Taiwan)

  • Yi-Hwa Hsu

    (Merry Electronics Co., Ltd., Taiwan)

Registered author(s):

    Abstract

    A binomial model is developed to value options when the underlying process follows the constant elasticity of variance (CEV) model. This model is proposed by Cox and Ross (1976) as an alternative to the Black and Scholes (1973) model. In the CEV model, the stock price change (dS) has volatility £mS £]/2 instead of £mS in the Black-Scholes model. The rationale behind the CEV model is that the model can explain the empirical bias exhibited by the Black-Scholes model, such as the volatility smile. The option pricing formula when the underlying process follows the CEV model is derived by Cox and Ross (1976), and the formula is further simplified by Schroder (1989). However, the closed-form formula is useful in some limited cases. In this paper, a binomial process for the CEV model is constructed to yield a simple and efficient computation procedure for practical valuation of standard options. The binomial option pricing model can be employed under general conditions. Also, on average, the numerical results show the binomial option pricing model approximates better than other analytic approximations.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.ijbe.org/table%20of%20content/pdf/vol4-2/vol4-2-05.pdf
    Download Restriction: no

    File URL: http://www.ijbe.org/table%20of%20content/abstract/Vol.4/No.2/05.htm
    Download Restriction: no

    Bibliographic Info

    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 4 (2005)
    Issue (Month): 2 (August)
    Pages: 157-165

    as in new window
    Handle: RePEc:ijb:journl:v:4:y:2005:i:2:p:157-165

    Contact details of provider:
    Postal: 100 Wenhwa Road, Seatwen, Taichung
    Web page: http://www.ijbe.org/
    More information through EDIRC

    Related research

    Keywords: binomial model; constant elasticity of variance model; option pricingtakeovers;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    2. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    3. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    4. Beckers, Stan, 1980. " The Constant Elasticity of Variance Model and Its Implications for Option Pricing," Journal of Finance, American Finance Association, vol. 35(3), pages 661-73, June.
    5. Schroder, Mark Douglas, 1989. " Computing the Constant Elasticity of Variance Option Pricing Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 211-19, March.
    6. Emanuel, David C. & MacBeth, James D., 1982. "Further Results on the Constant Elasticity of Variance Call Option Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(04), pages 533-554, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ijb:journl:v:4:y:2005:i:2:p:157-165. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yi-Ju Su).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.