Pricing American options under the constant elasticity of variance model: An extension of the method by Barone-Adesi and Whaley

Luca Vincenzo Ballestra and Liliana Cecere

Finance Research Letters, 2015, vol. 14, issue C, 45-55

Abstract: We consider the problem of pricing American options on an underlying described by the constant elasticity of variance (CEV) model. Such a problem does not have an exact closed-form solution, and therefore some kind of approximation is required. In this paper we extend the approach proposed by Barone-Adesi and Whaley (1997), which allows us to obtain a direct semi-analytical approximate solution. Numerical experiments are presented showing that the proposed method is satisfactorily accurate and computationally very fast.

Keywords: CEV model; American option; Barone-Adesi and Whaley; Free boundary; Option pricing (search for similar items in EconPapers)
JEL-codes: C02 C63 G13 G17 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:14:y:2015:i:c:p:45-55

DOI: 10.1016/j.frl.2015.05.017

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