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Constant Elasticity of Variance Option Pricing Model: Integration and Detailed Derivation

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

Listed:
  • Y. L. Hsu
  • T. L. Lin
  • Cheng Few Lee

Abstract

In this paper, we review the renowned constant elasticity of variance (CEV) option pricing model and give the detailed derivations. There are two purposes of this chapter. First, we show the details of the formulae needed in deriving the option pricing and bridge the gaps in deriving the necessary formulae for the model. Second, we use a result by Feller to obtain the transition probability density function of the stock price at time T given its price at time t. In addition, some computational considerations are given for the facilitation of computing the CEV option pricing formula.

Suggested Citation

  • Y. L. Hsu & T. L. Lin & Cheng Few Lee, 2020. "Constant Elasticity of Variance Option Pricing Model: Integration and Detailed Derivation," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 109, pages 3829-3847, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0109
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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