Option Pricing with a Pentanomial Lattice Model that Incorporates Skewness and Kurtosis
AbstractThis paper analyzes a pentanomial lattice model for option pricing that incorporates skewness and kurtosis of the underlying asset. The lattice is constructed using a moment matching procedure, and explicit positivity conditions for branch probabilities are provided in terms of skewness and kurtosis. We also explore the limiting distribution of this lattice, which is compound Poisson, and give a Fourier transform based formula that can be used to more efficiently price European call and put options. An example illustrates some of the features of this model in capturing volatility smiles and smirks.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 14 (2007)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RAMF20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Arturo Leccadito & Pietro Toscano & Radu S. Tunaru, 2012. "Hermite Binomial Trees: A Novel Technique For Derivatives Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(08), pages 1250058-1-1.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.