The constant elasticity of variance model: calibration, test and evidence from the Italian equity market

Luca Vincenzo Ballestra and Graziella Pacelli ()

Applied Financial Economics, 2011, vol. 21, issue 20, 1479-1487

Abstract: We present a robust and reliable methodology to calibrate and test the Constant Elasticity of Variance (CEV) model. Precisely, the parameters of the model are estimated by maximum likelihood, and an efficient numerical method to maximize the likelihood function is developed. Furthermore, a consistent and effective goodness-of-fit test of the CEV model is obtained using the Rosenblatt probability transformation and the χ2 analysis. The novel procedure is employed to investigate the performances of the model on the Italian market. This analysis reveals that the CEV model does not offer a correct description of equity prices.

Keywords: CEV model; maximum likelihood; goodness-of-fit test; stock prices (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/09603107.2011.579058

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