Economics at your fingertips  

Computing the CEV option pricing formula using the semiclassical approximation of path integral

Axel A. Araneda and Marcelo Villena

Papers from

Abstract: The Constant Elasticity of Variance (CEV) model significantly outperforms the Black-Scholes (BS) model in forecasting both prices and options. Furthermore, the CEV model has a marked advantage in capturing basic empirical regularities such as: heteroscedasticity, the leverage effect, and the volatility smile. In fact, the performance of the CEV model is comparable to most stochastic volatility models, but it is considerable easier to implement and calibrate. Nevertheless, the standard CEV model solution, using the non-central chi-square approach, still presents high computational times, specially when: i) the maturity is small, ii) the volatility is low, or iii) the elasticity of the variance tends to zero. In this paper, a new numerical method for computing the CEV model is developed. This new approach is based on the semiclassical approximation of Feynman's path integral. Our simulations show that the method is efficient and accurate compared to the standard CEV solution considering the pricing of European call options.

Date: 2018-03
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Latest version (application/pdf)

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:

Access Statistics for this paper

More papers in Papers from
Bibliographic data for series maintained by arXiv administrators ().

Page updated 2020-04-20
Handle: RePEc:arx:papers:1803.10376