Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model
Joint Authors
Fan, Congyin
Xiang, Kaili
Chen, Peimin
Source
Discrete Dynamics in Nature and Society
Issue
Vol. 2016, Issue 2016 (31 Dec. 2016), pp.1-9, 9 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2016-03-22
Country of Publication
Egypt
No. of Pages
9
Main Subjects
Abstract EN
Market crashes often appear in daily trading activities and such instantaneous occurring events would affect the stock prices greatly.
In an unstable market, the volatility of financial assets changes sharply, which leads to the fact that classical option pricing models with constant volatility coefficient, even stochastic volatility term, are not accurate.
To overcome this problem, in this paper we put forward a dynamic elasticity of variance (DEV) model by extending the classical constant elasticity of variance (CEV) model.
Further, the partial differential equation (PDE) for the prices of European call option is derived by using risk neutral pricing principle and the numerical solution of the PDE is calculated by the Crank-Nicolson scheme.
In addition, Kalman filtering method is employed to estimate the volatility term of our model.
Our main finding is that the prices of European call option under our model are more accurate than those calculated by Black-Scholes model and CEV model in financial crashes.
American Psychological Association (APA)
Fan, Congyin& Xiang, Kaili& Chen, Peimin. 2016. Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model. Discrete Dynamics in Nature and Society،Vol. 2016, no. 2016, pp.1-9.
https://search.emarefa.net/detail/BIM-1103552
Modern Language Association (MLA)
Fan, Congyin…[et al.]. Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model. Discrete Dynamics in Nature and Society No. 2016 (2016), pp.1-9.
https://search.emarefa.net/detail/BIM-1103552
American Medical Association (AMA)
Fan, Congyin& Xiang, Kaili& Chen, Peimin. Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model. Discrete Dynamics in Nature and Society. 2016. Vol. 2016, no. 2016, pp.1-9.
https://search.emarefa.net/detail/BIM-1103552
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-1103552