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|
|Date of revision:|
|Publication status:||Forthcoming in Computational Economics|
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Center for Financial Institutions Working Papers
02-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
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