Option Pricing and Distribution Characteristics
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.
|Date of creation:||Nov 2012|
|Publication status:||Forthcoming in Computational Economics|
|Contact details of provider:|| Postal: 130 Faculty Office Building, P.O. Box 22363, Brigham Young University, Provo, Utah 84602|
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- Kabir K. Dutta & David F. Babbel, 2005.
"Extracting Probabilistic Information from the Prices of Interest Rate Options: Tests of Distributional Assumptions,"
The Journal of Business,
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- Kabir K. Dutta & David F. Babbel, 2002. "Extracting Probabilistic Information from the Prices of Interest Rate Options: Tests of Distributional Assumptions," Center for Financial Institutions Working Papers 02-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
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- Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-1632, December.
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