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Title: CEV Asymptotics of American Options
Authors: Pun, Chi Seng
Wong, Hoi Ying
Keywords: Perturbation technique
CEV model
American options
Partial differential equation
Issue Date: 2013
Source: Pun, C. S., & Wong, H. Y. (2013). CEV asymptotics of American options. Journal of Mathematical Analysis and Applications, 403(2), 451-463.
Series/Report no.: Journal of Mathematical Analysis and Applications
Abstract: The constant elasticity of variance (CEV) model is a practical approach to option pricing by fitting to the implied volatility smile. Its application to American-style derivatives, however, poses analytical and numerical challenges. By taking the Laplace–Carson transform (LCT) to the free-boundary value problem characterizing the option value function and the early exercise boundary, the analytical result involves confluent hyper-geometric functions. Thus, the numerical computation could be unstable and inefficient for certain set of parameter values. We solve this problem by an asymptotic approach to the American option pricing problem under the CEV model. We demonstrate the use of the proposed approach using perpetual and finite-time American puts.
ISSN: 0022-247X
DOI: 10.1016/j.jmaa.2013.02.036
Schools: School of Physical and Mathematical Sciences 
Rights: © 2013 Elsevier. This is the author created version of a work that has been peer reviewed and accepted for publication by Journal of Mathematical Analysis and Applications, Elsevier. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [].
Fulltext Permission: open
Fulltext Availability: With Fulltext
Appears in Collections:SPMS Journal Articles

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