Approximate option pricing and hedging in the CEV model via path-wise comparison of stochastic processes

Vladislav Krasin, Ivan Smirnov and Alexander Melnikov ()
Additional contact information
Vladislav Krasin: Barclays Capital
Ivan Smirnov: Susquehanna International Group
Alexander Melnikov: University of Alberta

Annals of Finance, 2018, vol. 14, issue 2, No 2, 195-209

Abstract: Abstract This paper presents a methodology of finding explicit boundaries for some financial quantities via comparison of stochastic processes. The path-wise comparison theorem is used to establish domination of the stock price process by a process with a known distribution that is relatively simple. We demonstrate how the comparison theorem can be applied in the constant elasticity of variance model to derive closed-form expressions for option price bounds, an approximate hedging strategy and a conditional value-at-risk estimate. We also provide numerical examples and compare precision of our method with the distribution-free approach.

Keywords: Stochastic differential equations; Comparison theorem; Option pricing; Constant elasticity of variance model (search for similar items in EconPapers)
JEL-codes: C61 C63 G13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10436-017-0309-9 Abstract (text/html)
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:kap:annfin:v:14:y:2018:i:2:d:10.1007_s10436-017-0309-9

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10436/PS2

DOI: 10.1007/s10436-017-0309-9

Access Statistics for this article

Annals of Finance is currently edited by Anne Villamil

More articles in Annals of Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().