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Option Pricing and Distribution Characteristics

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Author Info

  • David J. Mauler

    () (Department of Economics, Brigham Young University)

  • James B. McDonald

    () (Department of Economics, Brigham Young University)

Abstract

A number of flexible distributions (generalized beta of the second kind, inverse hyperbolic sine, g-and-h, Weibull, Burr-3, Burr-12, generalized gamma) are examined in the setting of option-pricing to explore potential improvements over the standard assumption of lognormal returns. Price formulas are presented specific to each assumed distributional form. The IHS option price formula has not previously been presented in the literature. An empirical application follows where implied risk-neutral density functions for each distribution are estimated from options on the S&P 500 Index. The distributions' performance relative to one another is then evaluated, with the GB2 appearing to be the most attractive choice.

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File Function: First version, 2012
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Bibliographic Info

Paper provided by Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory in its series BYU Macroeconomics and Computational Laboratory Working Paper Series with number 2012-08.

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Length: 19 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:byu:byumcl:201208

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Keywords: Option Pricing; Implied Distributions; Generalized Distributions;

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