Skip to main content
    • Aa
    • Aa

Pricing American Options under the Constant Elasticity of Variance Model and Subject to Bankruptcy

  • João Pedro Vidal Nunes (a1)

This paper proposes an alternative characterization of the early exercise premium that is valid for any Markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary. This new representation is shown to provide the best pricing alternative available in the literature for medium- and long-term American option contracts, under the constant elasticity of variance model. Moreover, the proposed pricing methodology is also extended easily to the valuation of American options on defaultable equity and possesses appropriate asymptotic properties.

Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

G Barone-Adesi . “The Saga of the American Put.” Journal of Banking and Finance, 29 (2005), 29092918.

G. Barone-Adesi , and R. Whaley . “Efficient Analytic Approximation of American Option Values.” Journal of Finance, 42 (1987), 301320.

G. Bekaert , and G. Wu . “Asymmetric Volatility and Risk in Equity Markets.” Review of Financial Studies, 13 (2000), 142.

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

P. Boyle , and Y. Tian . “Pricing Lookback and Barrier Options under the CEV Process.” Journal of Financial and Quantitative Analysis, 34 (1999), 241264.

M. Brennan , and E. Schwartz . “The Valuation of American Put Options.” Journal of Finance, 32 (1977), 449462.

M. Broadie , and J. Detemple . “American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods.” Review of Financial Studies, 9 (1996), 12111250.

D. Bunch , and H. Johnson . “The American Put Option and Its Critical Stock Price.” Journal of Finance, 55 (2000), 23332356.

A. Buonocore ; A. Nobile ; and L. Ricciardi . “A New Integral Equation for the Evaluation of First-Passage-Time Probability Densities.” Advances in Applied Probability, 19 (1987), 784800.

J. Campbell , and G. Taksler . “Equity Volatility and Corporate Bond Yields.” Journal of Finance, 58 (2003), 23212349.

P Carr . “Randomization and the American Put.” Review of Financial Studies, 11 (1998), 597626.

P. Carr ; R. Jarrow ; and R. Myneni . “Alternative Characterizations of American Put Options.” Mathematical Finance, 2 (1992), 87106.

P. Carr , and V. Linetsky . “A Jump to Default Extended CEV Model: An Application of Bessel Processes.” Finance and Stochastics, 10 (2006), 303330.

S. Chung , and M. Shackleton . “Generalised Geske-Johnson Interpolation of Option Prices.” Journal of Business Finance and Accounting, 34 (2007), 9761001.

J. Cox ; S. Ross ; and M. Rubinstein . “Option Pricing: A Simplified Approach.” Journal of Financial Economics, 7 (1979), 229263.

D. Davydov , and V. Linetsky . “Pricing and Hedging Path-Dependent Options under the CEV Process.” Management Science, 47 (2001), 949965.

P. Dennis , and S. Mayhew . “Risk-Neutral Skewness: Evidence from Stock Options.” Journal of Financial and Quantitative Analysis, 37 (2002), 471493.

J. Detemple , and W. Tian . “The Valuation of American Options for a Class of Diffusion Processes.” Management Science, 48 (2002), 917937.

D. Emanuel , and J. MacBeth . “Further Results on the Constant Elasticity of Variance Call Option Pricing Model.” Journal of Financial and Quantitative Analysis, 17 (1982), 533554.

R. Geske , and H. Johnson . “The American Put Option Valued Analytically.” Journal of Finance, 39 (1984), 15111524.

J. Huang ; M. Subrahmanyam ; and G. G. Yu . “Pricing and Hedging American Options: A Recursive Integration Method.” Review of Financial Studies, 9 (1996), 277300.

J Ingersoll . “Approximating American Options and Other Financial Contracts Using Barrier Derivatives.” Journal of Computational Finance, 2 (1998), 85112.

S Jacka . “Optimal Stopping and the American Put.” Mathematical Finance, 1 (1991), 114.

H Johnson . “An Analytical Approximation for the American Put Price.” Journal of Financial and Quantitative Analysis, 18 (1983), 141148.

N Ju . “Pricing an American Option by Approximating Its Early Exercise Boundary as a Multipiece Exponential Function.” Review of Financial Studies, 11 (1998), 627646.

N. Ju , and R. Zhong . “An Approximate Formula for Pricing American Options.” Journal of Derivatives, 7 (1999), 3140.

I Karatzas . “On the Pricing of American Options.” Applied Mathematics and Optimization, 17 (1988), 3760.

J Kim . “The Analytic Valuation of American Options.” Review of Financial Studies, 3 (1990), 547572.

J. Kim , and G. G. Yu . “An Alternative Approach to the Valuation of American Options and Applications.” Review of Derivatives Research, 1 (1996), 6185.

G. Kuan , and N. Webber . “Pricing Barrier Options with One-Factor Interest Rate Models.” Journal of Derivatives, 10 (2003), 3350.

V Linetsky . “Pricing Equity Derivatives Subject to Bankruptcy.” Mathematical Finance, 16 (2006), 255282.

F. Longstaff , and E. Schwartz . “A Simple Approach to Valuing Risky Fixed and Floating Rate Debt.” Journal of Finance, 50 (1995), 789819.

D. Madan , and H. Unal . “Pricing the Risks of Default.” Review of Derivatives Research, 2 (1998), 121160.

R Merton . “The Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science, 4 (1973), 141183.

D. Nelson , and K. Ramaswamy . “Simple Binomial Processes as Diffusion Approximations in Financial Models.” Review of Financial Studies, 3 (1990), 393430.

C. Park , and F. Schuurmann . “Evaluations of Barrier-Crossing Probabilities of Wiener Paths.” Journal of Applied Probability, 13 (1976), 267275.

A Sbuelz . “Analytical American Option Pricing: The Flat-Barrier Lower Bound.” Economic Notes, 33 (2004), 399413.

M Schroder . “Computing the Constant Elasticity of Variance Option Pricing Formula.” Journal of Finance, 44 (1989), 211219.

S Shreve . Stochastic Calculus for Finance II: Continuous-Time Models. New York: Springer (2004).

M Sullivan . “Valuing American Put Options Using Gaussian Quadrature.” Review of Financial Studies, 13 (2000), 7594.

P Van Moerbeke . “On Optimal Stopping and Free Boundary Problems.” Archive for Rational Mechanics and Analysis, 60 (1976), 101148.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 16 *
Loading metrics...

Abstract views

Total abstract views: 73 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 23rd March 2017. This data will be updated every 24 hours.