Computing the CEV option pricing formula using the semiclassical approximation of path integral

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Authors

ARANEDA Axel Alejandro VILLENA Marcelo J.

Year of publication 2021
Type Article in Periodical
Magazine / Source Journal of Computational and Applied Mathematics
MU Faculty or unit

Faculty of Economics and Administration

Citation
Web https://www.sciencedirect.com/science/article/pii/S0377042720305355?pes=vor
Doi http://dx.doi.org/10.1016/j.cam.2020.113244
Keywords Option pricing; Constant elasticity of variance; Path integral; Semiclassical approximation; Numerical methods
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Description The CEV model allows volatility to change with the underlying price, capturing a basic empirical regularity very relevant for option pricing, such as the volatility smile. Nevertheless, the standard CEV solution, using the non-central chi-square approach, still presents high computational times. In this paper, the CEV option pricing formula is computed using the semiclassical approximation of Feynman's path integral. Our simulations show that the method is quite efficient and accurate compared to the standard CEV solution considering the pricing of European call options.
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