Real-World Pricing for a Modified Constant Elasticity of Variance Model
AbstractThis paper considers a modified constant elasticity of variance (MCEV) model. This model uses the familiar constant elasticity of variance form for the volatility of the growth optimal portfolio (GOP) in a continuous market. It leads to a GOP that follows the power of a time-transformed squared Bessel process. This paper derives analytic real-world prices for zero-coupon bonds, instantaneous forward rates and options on the GOP that are both theoretically revealing and computationally efficient. In addition, the paper examines options on exchange prices and options on zero-coupon bonds under the MCEV model. The semi-analytic prices derived for options on zero-coupon bonds can subsequently be used to price interest rate caps and floors.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 17 (2010)
Issue (Month): 2 ()
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Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=100141
Other versions of this item:
- Shane M Miller & Eckhard Platen, 2008. "Real World Pricing for a Modified Constant Elasticity of Variance Model," Research Paper Series 237, Quantitative Finance Research Centre, University of Technology, Sydney.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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