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Real-World Pricing for a Modified Constant Elasticity of Variance Model
- DOI:
- 10.1080/13504860903155035
pages 147-175
Available online: 25 Sep 2009Abstract
This paper considers a modified constant elasticity of variance (MCEV) model. This model uses the familiar constant elasticity of variance form for the volatility of the growth optimal portfolio (GOP) in a continuous market. It leads to a GOP that follows the power of a time-transformed squared Bessel process. This paper derives analytic real-world prices for zero-coupon bonds, instantaneous forward rates and options on the GOP that are both theoretically revealing and computationally efficient. In addition, the paper examines options on exchange prices and options on zero-coupon bonds under the MCEV model. The semi-analytic prices derived for options on zero-coupon bonds can subsequently be used to price interest rate caps and floors.
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- Available online: 25 Sep 2009
Author affiliations
- a Citigroup Global Markets Australia Pty Ltd, Sydney, NSW, Australia
- b School of Finance and Economics, University of Technology, Sydney, NSW, 2007, Australia
- c Department of Mathematical Sciences, University of Technology, Sydney, NSW, 2007, Australia
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