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The constant elasticity of variance model: calibration, test and evidence from the Italian equity market

Author

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  • Luca Vincenzo Ballestra
  • Graziella Pacelli

Abstract

We present a robust and reliable methodology to calibrate and test the Constant Elasticity of Variance (CEV) model. Precisely, the parameters of the model are estimated by maximum likelihood, and an efficient numerical method to maximize the likelihood function is developed. Furthermore, a consistent and effective goodness-of-fit test of the CEV model is obtained using the Rosenblatt probability transformation and the χ2 analysis. The novel procedure is employed to investigate the performances of the model on the Italian market. This analysis reveals that the CEV model does not offer a correct description of equity prices.

Suggested Citation

  • Luca Vincenzo Ballestra & Graziella Pacelli, 2011. "The constant elasticity of variance model: calibration, test and evidence from the Italian equity market," Applied Financial Economics, Taylor & Francis Journals, vol. 21(20), pages 1479-1487.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:20:p:1479-1487
    DOI: 10.1080/09603107.2011.579058
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    Cited by:

    1. Ballestra, Luca Vincenzo & Cecere, Liliana, 2015. "Pricing American options under the constant elasticity of variance model: An extension of the method by Barone-Adesi and Whaley," Finance Research Letters, Elsevier, vol. 14(C), pages 45-55.
    2. Ballestra, Luca Vincenzo & Cecere, Liliana, 2016. "A numerical method to estimate the parameters of the CEV model implied by American option prices: Evidence from NYSE," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 100-106.

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