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Valuation of American Continuous-Installment Options Under the Constant Elasticity of Variance Model
Guohe DENG, Guangming XUE
Journal of Systems Science and Information ›› 2016, Vol. 4 ›› Issue (2) : 149-168.
PDF(266 KB)
PDF(266 KB)
Valuation of American Continuous-Installment Options Under the Constant Elasticity of Variance Model
This article prices American-style continuous-installment options in the constant elasticity of variance (CEV) diffusion model where the volatility is a function of the stock price. We derive the semi-closed form formulas for the American continuous-installment options using Kim's integral representation method and then obtain the closed-form solutions by approximating the optimal exercise and stopping boundaries as step functions. We demonstrate the speed-accuracy of our approach for different parameters of the CEV model. Furthermore, the effects on both option price and the optimal boundaries are discussed and the causes of underestimating or overestimating the option prices are analyzed under the classical Black-Scholes-Merton model, in particular, for the case of elasticity coefficient with numerical examples.
American continuous-installment option / CEV model / numerical integration method {{custom_keyword}} /
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Supported by the National Natural Science Foundation of China (11461008), the Humanities and Social Science Research Foundation of the Ministry of Education of China (13YJA910003), Guangxi Natural Science Foundation (2013GXNSFAA019005), and the Key Research Foundation of Science and Technology of the Education Department of Guangxi Province (2013ZD010)
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