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 article. 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 with t < T. In addition, some computational considerations are given which will facilitate the computation of the CEV option pricing formula.
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Notes
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∗This paper is dedicated to honor and memory my Ph.D. advisor, Prof. Jack C. Lee, who died from cardiovascular disease on 2 March 2007. This paper is reprinted from Mathematics and Computers in Simulation, 79 (2008), pp. 60–71.
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Acknowledgements
We gratefully acknowledge the editor and an anonymous referee for his insightful comments and suggestions of the paper. Research Supported in Part by NSC grant 95-2118-M-005-003.
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Hsu, Y.L., Lin, T.I., Lee, C.F. (2010). Constant Elasticity of Variance Option Pricing Model: Integration and Detailed Derivation. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_31
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DOI: https://doi.org/10.1007/978-0-387-77117-5_31
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