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Publication Detailed Description
Scientific journal paper
Q2
A note on options and bubbles under the CEV model: Implications for pricing and hedging
Journal Title
Review of Derivatives Research
Year (definitive publication)
2020
Language
English
Country
United States of America
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Abstract
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.
Acknowledgements
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Keywords
Bubbles,CEV model,Greeks,Option pricing,Put-call parity,Local martingales
Fields of Science and Technology Classification
- Economics and Business - Social Sciences
Funding Records
| Funding Reference | Funding Entity |
|---|---|
| UID/GES/00315/2019 | Fundação para a Ciência e a Tecnologia |
Publication Identifiers
| 10.1007/s11147-019-09164-x | |
| 2-s2.0-85073999214 | |
| 10.1007/s11147-019-09164-x | |
| WOS:000565766900002 | |
| 000565766900002 | |
| 2-s2.0-85073999214 | |
| ci-pub-61925 |
Other Publication Details
