Constant Elasticity of Variance Option Pricing Model: Integration and Detailed Derivation

Y. L. Hsu, T. L. Lin and Cheng Few Lee

Chapter 109 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 3829-3847 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this paper, we review the renowned constant elasticity of variance (CEV) option pricing model and give the detailed derivations. There are two purposes of this chapter. First, we show the details of the formulae needed in deriving the option pricing and bridge the gaps in deriving the necessary formulae for the model. Second, we use a result by Feller to obtain the transition probability density function of the stock price at time T given its price at time t. In addition, some computational considerations are given for the facilitation of computing the CEV option pricing formula.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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