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 InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 237.
Date of creation: 01 Nov 2008
Date of revision:
benchmark approach; real-world pricing; growth optimal portfolio; constant elasticity of variance; zero-coupon bonds; exchange prices; interest rate caps and floors;
Other versions of this item:
- Shane Miller & Eckhard Platen, 2010. "Real-World Pricing for a Modified Constant Elasticity of Variance Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(2), pages 147-175.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-14 (All new papers)
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