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Further Results on the Constant Elasticity of Variance Call Option Pricing Model

Abstract

The Black-Scholes [4] call option model is a member of the class of constant elasticity of variance call option models proposed by Cox [6]. While the Black-Scholes model assumes that the volatility or instantaneous variance of return is constant through time, the other members of the class allow the volatility to change with the stock price. This property is of interest because empirical evidence suggests that returns to common stock are heteroscedastic and also that volatilities, implied from the Black-Scholes model and market prices of call options, are not constant.

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[1]Fisher Black . “Fact and Fantasy in the Use of Options.” Financial Analysts Journal, Vol. (07081975), pp. 3672.

[4]F. Black , and M. Scholes . “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, Vol. 81 (1973), pp. 637654.

[5]R. C. Blattberg , and N. J. Gonedes . “A Comparison of the Stable and Student Distributions as Stochastic Models for Stock Prices.” Journal of Business, Vol. 47 (1974), pp. 244280.

[7]John Cox , and Stephen Ross . “The Valuation of Options for Alternative Stochastic Processes.” Journal of Financial Economics, Vol. (01/031976), pp.

[10]J. MacBeth , and L. Merville . “Tests of the Black-Scholes and Cox Call Option Valuation Models.” Journal of Finance, Vol. 35 (1980), pp. 285301.

[11]R. Roll An Analytic Valuation Formula for Unprotected American Call Options on Stocks with Known Dividends.” Journal of Financial Economics, Vol. 5 (1977), pp. 251258.

[15]R. Schmalensee , and R. Trippi . “Common Stock Volatility Expectations Implied by Option Premia.” The Journal of Finance, Vol. 33, No. 1 (031978), pp. 129147.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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