Artigo em revista científica Q3
A note on options and bubbles under the CEV model: implications for pricing and hedging
José Carlos Dias (Dias, J. C.); João Nunes (Nunes, J.); Aricson da Cruz (Cruz, A.);
Título Revista
Review of Derivatives Research
Ano
2019
Língua
Inglês
País
Estados Unidos da América
Mais Informação
Scopus

N.º de citações: 1

(Última verificação: 2020-07-02 10:12)

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Abstract/Resumo
The discounted price process under the constant elasticity of variance (CEV) model is not a martingale (wrt the risk-neutral measure) for options markets with upward sloping implied volatility smiles. The loss of the martingale property implies the existence of (at least) two option prices for the call option: the price for which the put-call parity holds and the (risk-neutral) price representing the lowest cost of replicating the call payoff. This article derives closed-form solutions for the Greeks of the risk-neutral call option pricing solution that are valid for any CEV process exhibiting forward skew volatility smile patterns. Using an extensive numerical analysis, we conclude that the differences between the call prices and Greeks of both solutions are substantial, which might yield significant errors of analysis for pricing and hedging purposes.
Agradecimentos/Acknowledgements
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Palavras-chave
Bubbles,CEV model,Greeks,Option pricing,Put-call parity,Local martingales
  • Economia e Gestão - Ciências Sociais
Registos de financiamentos
Referência de financiamento Entidade Financiadora
UID/GES/00315/2019 Fundação para a Ciência e a Tecnologia