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 language | English |
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Pages (from-to) | 173-190 |
Number of pages | 18 |
Journal | Review of Pacific Basin Financial Markets and Policies |
Volume | 7 |
Issue number | 2 |
DOIs | |
State | Published - 06 2004 |
Externally published | Yes |
Keywords
- Black-Scholes model
- Constant elasticity of variance option model
- Non-central chi-square probability functions
- S&P 500 index