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Revisiting the Modi fed Constant Elasticity of Variance model

Past Seminar from the archive

  • Topic: Revisiting the Modifed Constant Elasticity of Variance model
  • Speaker: Katja Ignatieva, PhD candidate, Department of Applied Finance and Actuarial Studies, Macquarie University and Goethe University Frankfurt, Germany
  • Was held: 13th April, 2011, (Wed)

Abstract

In previous studies, the GOP has been modelled via the Minimal Market Model (MMM), which falls into the affine class, in a sense made precise in the paper. In this paper we considers powers of affine processes, which recover the Modified Constant Elasticity of Variance (MCEV) model. We establish that the MCEV model retains the analytical tractability of the MMM model. Furthermore, we show how to parameterize the MCEV model using non-parametric kernel-based estimation and find that it outperforms the Black-Scholes model and the MMM when it comes to the pricing and hedging of zero-coupon bonds.

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