Abstract
The constant elasticity of variance (CEV) diffusion process can be used to model heteroscedasticity in returns to common stocks. In this diffusion process, the volatility is a function of the stock price and involves two parameters. Similar to the Black-Scholes analysis, the equilibrium price of a call option can be obtained for the CEV model. The purpose of this paper is to propose a new estimation procedure for the CEV model. A merit of our method is that no constraints on the elasticity parameter of the model are imposed. In addition, frequent adjustments of the parameter estimates are not required. Simulation studies indicate that the proposed method is suitable for practical use. As an illustration, real examples on the Hong Kong stock option market are carried out. Various aspects of the method are also discussed.
KEYWORDS: Constant Elasticity of Variance; Diffusion Process; Least Squares; Option Pricing; Volatility.
Volume
Toyko
Year
1999
Categories
Financial and Statistical Methods
Asset and Econometric Modeling
Actuarial Applications and Methodologies
Investments
Financial and Statistical Methods
Statistical Models and Methods
Publications
ASTIN Colloquium
