Simulation of the CEV process and the local martingale property

A.E. Lindsay and D.R. Brecher

Mathematics and Computers in Simulation (MATCOM), 2012, vol. 82, issue 5, 868-878

Abstract: We consider the constant elasticity of variance (CEV) process, reviewing the relationships between its transition density and that of the non-central chi-squared distribution. When the CEV parameter exceeds one, the forward price process is a strictly local martingale, and the price of a plain vanilla European call option reflects this fact. We develop techniques for Monte Carlo simulation of the CEV process, for all parameter regimes, and compare the results against the analytic expressions for plain vanilla European option prices. Using these techniques, we also verify the local martingale property.

Keywords: CEV process; Bessel process; Local martingale (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378475412000079
Full text for ScienceDirect subscribers only

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:eee:matcom:v:82:y:2012:i:5:p:868-878

DOI: 10.1016/j.matcom.2011.12.006

Access Statistics for this article

Mathematics and Computers in Simulation (MATCOM) is currently edited by Robert Beauwens

More articles in Mathematics and Computers in Simulation (MATCOM) from Elsevier
Bibliographic data for series maintained by Catherine Liu ().