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European Option Pricing Under Fuzzy CEV Model

Author

Listed:
  • Xinyue Wei

    (Hebei University)

  • Cuilian You

    (Hebei University
    Hebei University)

  • Yujie Zhang

    (Hebei University)

Abstract

In modern financial market, option is a very effective tool to hedge the risks brought by various uncertainties in real society. Therefore, it is of great significance to select an appropriate stock model to price options. To this aim, the paper presents a general stock model with fuzzy volatility for fuzzy financial market, that is, fuzzy constant elasticity of variance model. The advantage is that the fuzzy volatility of underlying stock is related to its price and can explain volatility smile. In addition, we consider the impact of elasticity coefficient on stock price and then limit the elasticity coefficient to a reasonable range. Subsequently, the European call and European put option pricing formulas are given, separately. Finally, some figures and tables are given to illustrate the impact of parameter changes on option prices.

Suggested Citation

  • Xinyue Wei & Cuilian You & Yujie Zhang, 2023. "European Option Pricing Under Fuzzy CEV Model," Journal of Optimization Theory and Applications, Springer, vol. 196(2), pages 415-432, February.
    • Handle: RePEc:spr:joptap:v:196:y:2023:i:2:d:10.1007_s10957-022-02108-w
    DOI: 10.1007/s10957-022-02108-w
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    References listed on IDEAS

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    1. Jingtang Ma & Zhengyang Lu & Wenyuan Li & Jie Xing, 2020. "Least-squares Monte-Carlo methods for optimal stopping investment under CEV models," Quantitative Finance, Taylor & Francis Journals, vol. 20(7), pages 1199-1211, July.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Bian, Liu & Li, Zhi, 2021. "Fuzzy simulation of European option pricing using sub-fractional Brownian motion," Chaos, Solitons & Fractals, Elsevier, vol. 153(P2).
    4. Aricson Cruz & José Carlos Dias, 2020. "Valuing American-style options under the CEV model: an integral representation based method," Review of Derivatives Research, Springer, vol. 23(1), pages 63-83, April.
    5. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    6. Lee, Jung-Kyung, 2020. "A simple numerical method for pricing American power put options," Chaos, Solitons & Fractals, Elsevier, vol. 139(C).
    7. Gu, Ailing & Guo, Xianping & Li, Zhongfei & Zeng, Yan, 2012. "Optimal control of excess-of-loss reinsurance and investment for insurers under a CEV model," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 674-684.
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    Cited by:

    1. Indu Rani & Chandan Kumar Verma, 2024. "Analyzing Short-Rate Models for Efficient Bond Option Pricing: A Review," SN Operations Research Forum, Springer, vol. 5(3), pages 1-26, September.
    2. Chinonso Nwankwo & Weizhong Dai & Tony Ware, 2023. "Enhancing accuracy for solving American CEV model with high-order compact scheme and adaptive time stepping," Papers 2309.03984, arXiv.org, revised Sep 2023.

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