We present a robust and reliable methodology to calibrate and test the Constant Elasticity of Variance (CEV) model. Precisely, the parameters of the model are estimated by maximum likelihood, and an efficient numerical method to maximize the likelihood function is developed. Furthermore, a consistent and effective goodness-of-fit test of the CEV model is obtained using the Rosenblatt probability transformation and the X2 analysis. The novel procedure is employed to investigate the performances of the model on the Italian market. This analysis reveals that the CEV model does not offer a correct description of equity prices. © 2011 Taylor & Francis.
Ballestra, L.V., Pacelli, G. (2011). The constant elasticity of variance model: Calibration, test and evidence from the Italian equity market. APPLIED FINANCIAL ECONOMICS, 21(20), 1479-1487 [10.1080/09603107.2011.579058].
The constant elasticity of variance model: Calibration, test and evidence from the Italian equity market
BALLESTRA, LUCA VINCENZO;
2011
Abstract
We present a robust and reliable methodology to calibrate and test the Constant Elasticity of Variance (CEV) model. Precisely, the parameters of the model are estimated by maximum likelihood, and an efficient numerical method to maximize the likelihood function is developed. Furthermore, a consistent and effective goodness-of-fit test of the CEV model is obtained using the Rosenblatt probability transformation and the X2 analysis. The novel procedure is employed to investigate the performances of the model on the Italian market. This analysis reveals that the CEV model does not offer a correct description of equity prices. © 2011 Taylor & Francis.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
