MATLAB Answers

Simulate trajectories of CEV process

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Emilie M
Emilie M on 30 Apr 2017
Answered: Chaitral Date on 8 May 2017
I am trying to create a MATLAB code that simulates trajectories of a constant elasticity of variance process (CEV).
My code is below.
M = 5000; % number of trajectories of CEV process
N = 250; % number of steps in one trajectory
X0 = 100; % initial point
T = 1; % final time in years in trajectory
a = 0.7; % constant
dt = T/N; % time step
X(1:M,1) = X0;
for j = 1:M
for i = 2:N+1
X(j,i) = 0.02*X(j,i-1)*dt + 0.15*X(j,i-1)^a*sqrt(dt)*randn;
t = 0:dt:T;
However, when I run the code the following warning message appears,
Warning: Imaginary parts of complex X and/or Y arguments ignored In ConstantElasticyVariance (line 19)
and weird straight lines are shown in the plot.
What am I doing wrong?

Answers (1)

Chaitral Date
Chaitral Date on 8 May 2017
Use the below function to see the graph more clearly.
I hope this helps.

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