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

Y. L. Hsu, T. L. Lin and Cheng Few Lee

Chapter 106 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 3463-3481 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter we review the renowned constant elasticity of variance (CEV) option pricing model and give the detailed derivations. There are two purposes of this article. 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 with. In addition, some computational considerations are given for the facilitation of computing the CEV option pricing formula.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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