The constant elasticity of variance models: New evidence from S&P 500 index options

C. F. Lee, Ta Peng Wu, Ren Raw Chen

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

The seminal work by Cox (1975, 1996), MacBeth and Merville (1979, 1980) and Emanuel and Macbeth (1982) show that, both theoretically and empirically, the constant elasticity of variance option model (CEV) is superior to the Black-Scholes model in explaining market prices. In this paper, we extend the MacBeth and Merville (1979, 1980) research by using a European contract (S&P 500 index options). We find supportive evidence to the MacBeth and Merville results although our sample is not subject to American premium biases. Furthermore, we reduce the approximation errors by using the non-central chi-square probability functions proposed by Shroder (1989).

Original languageEnglish (US)
Pages (from-to)173-190
Number of pages18
JournalReview of Pacific Basin Financial Markets and Policies
Volume7
Issue number2
DOIs
StatePublished - Jun 2004

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Black-Scholes model
  • Constant elasticity of variance option model
  • Non-central chi-square probability functions
  • S&P 500 index

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