Option pricing under extended normal distribution

✍ Scribed by Hosam Ki; Byungwook Choi; Kook-Hyun Chang; Miyoung Lee

• Book ID: 102219536
• Publisher: John Wiley and Sons
• Year: 2005
• Tongue: English
• Weight: 321 KB
• Volume: 25
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.20168

✦ Synopsis

This article proposes a closed pricing formula for European options when the return of the underlying asset follows extended normal distribution, that is, any different degrees of skewness and kurtosis relative to the normal distribution induced by the Black-Scholes model. The moment restriction is suggested, so that the pricing model under any arbitrary distribution for an underlying asset must satisfy the arbitrage-free condition. Numerical experiments and comparison of empirical performance of the proposed model with the Black-Scholes, ad hoc Black-Scholes, and Gram-Charlier distribution models are carried out. In particular, an estimation of implied parameters such as standard deviation, skewness, and kurtosis

The authors are grateful to Donghyun Ahn, Junhaeng Lee, Sankarshan Basu, Robert Webb, and an anonymous referee for helpful comments. All remaining errors are the authors'.