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The Binomial CEV Model and the Greeks
Author(s) -
Cruz Aricson,
Dias José Carlos
Publication year - 2017
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21791
Subject(s) - greeks , constant elasticity of variance model , mathematics , econometrics , log normal distribution , mathematical economics , statistics , stochastic volatility , volatility (finance) , economics , financial economics , sabr volatility model
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). © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:90–104, 2017