The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Computing the Constant Elasticity of Variance Option Pricing Formula
Published: 03/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb02414.x
MARK SCHRODER
This paper expresses the constant elasticity of variance option pricing formula in terms of the noncentral chi‐square distribution. This allows the application of well‐known approximation formulas and the derivation of a whole class of closed‐form solutions. In addition, a simple and efficient algorithm for computing this distribution is presented.
Risk‐Neutral Parameter Shifts and Derivatives Pricing in Discrete Time
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00702.x
MARK SCHRODER
We obtain a large class of discrete‐time risk‐neutral valuation relationships, or “preference‐free” derivatives pricing models, by imposing a simple restriction on the state‐price density process. The risk‐neutral stock‐return and forward‐rate dynamics are obtained by changing only a location parameter, which can be determined independent of the preference and true location parameters. The Gaussian models of Rubinstein (1976), Brennan (1979), and Câmera (2003), and the gamma model of Heston (1993) are all special cases. The model provides simple relationships between expected returns and state‐price density parameters analogous to the diffusion case.