TY - JOUR
T1 - Predicting the value of foreign currency call options with the Constant Elasticity of Variance diffusion process
AU - Hauser, Shmuel
AU - Galai, Dan
AU - Bagley, Charles
PY - 1992
Y1 - 1992
N2 - This paper examines the ability of the Constant Elasticity of Variance (CEV) model of Cox (1975) to explain observed behavior of foreign currency call option prices. A method using a derivative-free nonlinear regression is developed for jointly estimating the parameters of the class of CEV diffusion processes, and is applied to the valuation of foreign currency call options. The results indicate that the elasticity of variance is nonstationary and significantly less than unity. The CEV model is shown to reduce prediction errors with respect to time to maturity, degree of in-or out-of-the-money, and future volatility of exchange rates.
AB - This paper examines the ability of the Constant Elasticity of Variance (CEV) model of Cox (1975) to explain observed behavior of foreign currency call option prices. A method using a derivative-free nonlinear regression is developed for jointly estimating the parameters of the class of CEV diffusion processes, and is applied to the valuation of foreign currency call options. The results indicate that the elasticity of variance is nonstationary and significantly less than unity. The CEV model is shown to reduce prediction errors with respect to time to maturity, degree of in-or out-of-the-money, and future volatility of exchange rates.
UR - http://www.scopus.com/inward/record.url?scp=44049125005&partnerID=8YFLogxK
U2 - 10.1016/1057-5219(92)90006-p
DO - 10.1016/1057-5219(92)90006-p
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AN - SCOPUS:44049125005
SN - 1057-5219
VL - 1
SP - 225
EP - 236
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
IS - 3
ER -