The binomial CEV model and the Greeks

• Autor(a) principal: Cruz, A.
• Data de Publicação: 2017
• Outros Autores: Dias, J. C.
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/12319

This article compares alternative binomial approximation schemes for computing the option hedge ratios studied by Chung and Shackleton (2002), Chung, Hung, Lee, and Shih (2011), and Pelsser and Vorst (1994) under the lognormal assumption, but now considering the constant elasticity of variance (CEV) process proposed by Cox (1975) and using the continuous-time analytical Greeks recently offered by Larguinho, Dias, and Braumann (2013) as the benchmarks. Among all the binomial models considered in this study, we conclude that an extended tree binomial CEV model with the smooth and monotonic convergence property is the most efficient method for computing Greeks under the CEV diffusion process because one can apply the two-point extrapolation formula suggested by Chung et al. (2011)