Consistent pricing and hedging for a modified constant elasticity of variance model

David Heath and Eckhard Platen ()

Quantitative Finance, 2002, vol. 2, issue 6, 459-467

Abstract: This paper considers a modification of the well known constant elasticity of variance model where it is used to model the growth optimal portfolio (GOP). It is shown that, for this application, there is no equivalent risk neutral pricing measure and therefore the classical risk neutral pricing methodology fails. However, a consistent pricing and hedging framework can be established by application of the benchmark approach. Perfect hedging strategies can be constructed for European style contingent claims, where the underlying risky asset is the GOP. In this framework, fair prices for contingent claims are the minimal prices that permit perfect replication of the claims. Numerical examples show that these prices may differ significantly from the corresponding 'risk neutral' prices.

Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/14697688.2002.0000013 (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:taf:quantf:v:2:y:2002:i:6:p:459-467

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2002.0000013

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().