Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model
Market crashes often appear in daily trading activities and such instantaneous occurring events would affect the stock prices greatly. In an unstable market, the volatility of financial assets changes sharply, which leads to the fact that classical option pricing models with constant volatility coef...
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| Format: | Article |
| Language: | English |
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Wiley
2016-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/2016/7496539 |
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| _version_ | 1832564972987613184 |
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| author | Congyin Fan Kaili Xiang Peimin Chen |
| author_facet | Congyin Fan Kaili Xiang Peimin Chen |
| author_sort | Congyin Fan |
| collection | DOAJ |
| description | Market crashes often appear in daily trading activities and such instantaneous occurring events would affect the stock prices greatly. In an unstable market, the volatility of financial assets changes sharply, which leads to the fact that classical option pricing models with constant volatility coefficient, even stochastic volatility term, are not accurate. To overcome this problem, in this paper we put forward a dynamic elasticity of variance (DEV) model by extending the classical constant elasticity of variance (CEV) model. Further, the partial differential equation (PDE) for the prices of European call option is derived by using risk neutral pricing principle and the numerical solution of the PDE is calculated by the Crank-Nicolson scheme. In addition, Kalman filtering method is employed to estimate the volatility term of our model. Our main finding is that the prices of European call option under our model are more accurate than those calculated by Black-Scholes model and CEV model in financial crashes. |
| format | Article |
| id | doaj-art-83553dafda714844af5e81f4c6352980 |
| institution | Kabale University |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2016-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-83553dafda714844af5e81f4c63529802025-02-03T01:09:43ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2016-01-01201610.1155/2016/74965397496539Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance ModelCongyin Fan0Kaili Xiang1Peimin Chen2School of Economics and Mathematics, Southwestern University of Finance and Economics, Chengdu, Sichuan 611130, ChinaSchool of Economics and Mathematics, Southwestern University of Finance and Economics, Chengdu, Sichuan 611130, ChinaSchool of Economics and Mathematics, Southwestern University of Finance and Economics, Chengdu, Sichuan 611130, ChinaMarket crashes often appear in daily trading activities and such instantaneous occurring events would affect the stock prices greatly. In an unstable market, the volatility of financial assets changes sharply, which leads to the fact that classical option pricing models with constant volatility coefficient, even stochastic volatility term, are not accurate. To overcome this problem, in this paper we put forward a dynamic elasticity of variance (DEV) model by extending the classical constant elasticity of variance (CEV) model. Further, the partial differential equation (PDE) for the prices of European call option is derived by using risk neutral pricing principle and the numerical solution of the PDE is calculated by the Crank-Nicolson scheme. In addition, Kalman filtering method is employed to estimate the volatility term of our model. Our main finding is that the prices of European call option under our model are more accurate than those calculated by Black-Scholes model and CEV model in financial crashes.http://dx.doi.org/10.1155/2016/7496539 |
| spellingShingle | Congyin Fan Kaili Xiang Peimin Chen Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model Discrete Dynamics in Nature and Society |
| title | Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model |
| title_full | Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model |
| title_fullStr | Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model |
| title_full_unstemmed | Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model |
| title_short | Efficient Option Pricing in Crisis Based on Dynamic Elasticity of Variance Model |
| title_sort | efficient option pricing in crisis based on dynamic elasticity of variance model |
| url | http://dx.doi.org/10.1155/2016/7496539 |
| work_keys_str_mv | AT congyinfan efficientoptionpricingincrisisbasedondynamicelasticityofvariancemodel AT kailixiang efficientoptionpricingincrisisbasedondynamicelasticityofvariancemodel AT peiminchen efficientoptionpricingincrisisbasedondynamicelasticityofvariancemodel |