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Valuing American-style options under the CEV model: an integral representation based method

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  • Aricson Cruz

    (Instituto Universitário de Lisboa (ISCTE-IUL))

  • José Carlos Dias

    (Instituto Universitário de Lisboa (ISCTE-IUL))

Abstract

This article derives a new integral representation of the early exercise boundary for valuing American-style options under the constant elasticity of variance (CEV) model. An important feature of this novel early exercise boundary characterization is that it does not involve the usual (time) recursive procedure that is commonly employed in the so-called integral representation approach well known in the literature. Our non-time recursive pricing method is shown to be analytically tractable under the local volatility CEV process and the numerical experiments demonstrate its robustness and accuracy.

Suggested Citation

  • Aricson Cruz & José Carlos Dias, 2020. "Valuing American-style options under the CEV model: an integral representation based method," Review of Derivatives Research, Springer, vol. 23(1), pages 63-83, April.
    • Handle: RePEc:kap:revdev:v:23:y:2020:i:1:d:10.1007_s11147-019-09157-w
    DOI: 10.1007/s11147-019-09157-w
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    Cited by:

    1. Xinyue Wei & Cuilian You & Yujie Zhang, 2023. "European Option Pricing Under Fuzzy CEV Model," Journal of Optimization Theory and Applications, Springer, vol. 196(2), pages 415-432, February.
    2. Chinonso Nwankwo & Weizhong Dai & Tony Ware, 2023. "Enhancing accuracy for solving American CEV model with high-order compact scheme and adaptive time stepping," Papers 2309.03984, arXiv.org, revised Sep 2023.

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