Authors: Evangelos Melas
Addresses: Department of Economics, University of Athens, Sofokleous 1, Athens 10559, Greece
Abstract: Cox introduced the constant elasticity of variance (CEV) model in 1975, in order to capture this inverse relationship between the stock price and its volatility. An important parameter in the model is the parameter β, the elasticity of volatility. We use Kovacic's algorithm to derive, for all half-integer values of β, all solutions 'in quadratures' of the CEV ordinary differential equation (CEV ODE). These solutions give rise, by separation of variables, to simple solutions to the CEV partial differential equation. In particular, when β = …, −5⁄2, −2, −3⁄2, −1, 1, 3⁄2, 2, 5⁄2, …, we obtain four classes of denumerably infinite elementary function solutions, when β = −½ and β = ½ we obtain two classes of denumerably infinite elementary function solutions, whereas, when β = 0 we find two elementary function solutions.
Keywords: CEV model; solutions of ODEs; Kovacic algorithm.
International Journal of Financial Engineering and Risk Management, 2019 Vol.3 No.2, pp.172 - 179
Available online: 30 Jul 2019 *Full-text access for editors Access for subscribers Purchase this article Comment on this article