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The Constant Elasticity of Variance Models: New Evidence from S&P 500 Index Options

The Constant Elasticity of Variance Models: New Evidence from S&P 500 Index Options The seminal work by Cox (1975, 1996), MacBeth and Merville (1979, 1980)and Emanuel and Macbeth (1982) show that, both theoretically and empirically,the constant elasticity of variance option model (CEV) is superior to theBlack–Scholes model in explaining market prices. In this paper, weextend the MacBeth and Merville (1979, 1980) research by using a Europeancontract (S&P 500 index options). We find supportive evidence to theMacBeth and Merville results although our sample is not subject to Americanpremium biases. Furthermore, we reduce the approximation errors by using thenon-central chi-square probability functions proposed by Shroder (1989). http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Pacific Basin Financial Markets and Policies World Scientific Publishing Company

The Constant Elasticity of Variance Models: New Evidence from S&P 500 Index Options

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References (11)

Publisher
World Scientific Publishing Company
Copyright
Copyright ©
ISSN
0219-0915
eISSN
1793-6705
DOI
10.1142/S021909150400010X
Publisher site
See Article on Publisher Site

Abstract

The seminal work by Cox (1975, 1996), MacBeth and Merville (1979, 1980)and Emanuel and Macbeth (1982) show that, both theoretically and empirically,the constant elasticity of variance option model (CEV) is superior to theBlack–Scholes model in explaining market prices. In this paper, weextend the MacBeth and Merville (1979, 1980) research by using a Europeancontract (S&P 500 index options). We find supportive evidence to theMacBeth and Merville results although our sample is not subject to Americanpremium biases. Furthermore, we reduce the approximation errors by using thenon-central chi-square probability functions proposed by Shroder (1989).

Journal

Review of Pacific Basin Financial Markets and PoliciesWorld Scientific Publishing Company

Published: Jun 1, 2004

Keywords: Constant elasticity of variance option model Black–Scholes model S&P 500 index non-central chi-square probability functions

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