PRICING BARRIER OPTIONS WITH SQUARE ROOT PROCESS

C. F. Lo (), P. H. Yuen and C. H. Hui
Additional contact information
C. F. Lo: Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong, China
P. H. Yuen: Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong, China
C. H. Hui: Banking Policy Department, Hong Kong Monetary Authority, Hong Kong, China

International Journal of Theoretical and Applied Finance (IJTAF), 2001, vol. 04, issue 05, 805-818

Abstract: The square root constant elasticity of variance (CEV) process has been paid little attention in previous research on valuation of barrier options. In this paper we derive analytical option pricing formulae of up-and-out options with this process using the eigenfunction expansion technique. We develop an efficient algorithm to compute the eigenvalues where the basis functions in the formulae are the confluent hypergeometric functions. The numerical results obtained from the formulae are compared with the corresponding model prices under the Black–Scholes model. We find that the differences in the model prices between the square root CEV model and the Black–Scholes model can be significant as the time to maturity and volatility increases.

Keywords: Barrier options; constant elasticity of variance; partial differential equation (search for similar items in EconPapers)
Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S021902490100122X
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:04:y:2001:i:05:n:s021902490100122x

Ordering information: This journal article can be ordered from

DOI: 10.1142/S021902490100122X

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().