Constant Elasticity of Variance Option Pricing Model With Time-Dependent Parameters

14 Pages Posted: 8 May 2007

See all articles by Chi-Fai Lo

Chi-Fai Lo

The Chinese University of Hong Kong

P. H. Yuen

affiliation not provided to SSRN

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Abstract

This paper provides a method for pricing options in the constant elasticity of variance (CEV) model environment using the Lie-algebraic technique when the model parameters are time-dependent. Analytical solutions for the option values incorporating time-dependent model parameters are obtained in various CEV processes with different elasticity factors. The numerical results indicate that option values are sensitive to volatility term structures. It is also possible to generate further results using various functional forms for interest rate and dividend term structures. Furthermore, the Lie-algebraic approach is very simple and can be easily extended to other option pricing models with well-defined algebraic structures.

Keywords: Options, constant elasticity of variance, Lie Algebra

JEL Classification: F31, G13

Suggested Citation

Lo, Chi-Fai and Yuen, P. H. and Hui, Cho-Hoi, Constant Elasticity of Variance Option Pricing Model With Time-Dependent Parameters. International Journal of Theoretical and Applied Finance, Vol. 3, No. 4, pp. 661-674, 2000. Available at SSRN: https://ssrn.com/abstract=984373

Chi-Fai Lo (Contact Author)

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

P. H. Yuen

affiliation not provided to SSRN ( email )

No Address Available

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

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