The Constant Elasticity of Variance Models: New Evidence from S&P 500 Index Options

C. F. Lee (), Ta-Peng Wu () and Ren-Raw Chen ()
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C. F. Lee: Rutgers Business School, 94 Rockafeller Road, Piscataway, NJ 08854, USA
Ta-Peng Wu: enfoTech Inc., 11 Princess Rd., Unit A, Lawrenenceville, NJ 08648, USA
Ren-Raw Chen: Rutgers Business School, 94 Rockafeller Road, Piscataway, NJ 08854, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2004, vol. 07, issue 02, 173-190

Abstract: The seminal work by Cox (1975, 1996), MacBeth and Merville (1979, 1980) and Emanuel and Macbeth (1982) show that, both theoretically and empirically, the constant elasticity of variance option model (CEV) is superior to the Black–Scholes model in explaining market prices. In this paper, we extend the MacBeth and Merville (1979, 1980) research by using a European contract (S&P 500 index options). We find supportive evidence to the MacBeth and Merville results although our sample is not subject to American premium biases. Furthermore, we reduce the approximation errors by using the non-central chi-square probability functions proposed by Shroder (1989).

Keywords: Constant elasticity of variance option model; Black–Scholes model; S&P 500 index; non-central chi-square probability functions (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2004
References: View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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DOI: 10.1142/S021909150400010X

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