Valuation of American Continuous-Installment Options Under the Constant Elasticity of Variance Model

Deng Guohe () and Xue Guangming ()
Additional contact information
Deng Guohe: School of Mathematics and Statistics, Guangxi Normal University, Guilin541004, China
Xue Guangming: School of Information and Statistics, Guangxi University of Finance and Economics, Nanning530003, China

Journal of Systems Science and Information, 2016, vol. 4, issue 2, 149-168

Abstract: This article prices American-style continuous-installment options in the constant elasticity of variance (CEV) diffusion model where the volatility is a function of the stock price. We derive the semi-closed form formulas for the American continuous-installment options using Kim’s integral representation method and then obtain the closed-form solutions by approximating the optimal exercise and stopping boundaries as step functions. We demonstrate the speed-accuracy of our approach for different parameters of the CEV model. Furthermore, the effects on both option price and the optimal boundaries are discussed and the causes of underestimating or overestimating the option prices are analyzed under the classical Black-Scholes-Merton model, in particular, for the case of elasticity coefficient with numerical examples.

Keywords: American continuous-installment option; CEV model; numerical integration method (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.21078/JSSI-2016-149-20 (text/html)

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:bpj:jossai:v:4:y:2016:i:2:p:149-168:n:4

DOI: 10.21078/JSSI-2016-149-20

Access Statistics for this article

Journal of Systems Science and Information is currently edited by Shouyang Wang

More articles in Journal of Systems Science and Information from De Gruyter
Bibliographic data for series maintained by Peter Golla ().