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|
|Contact details of provider:|| Postal: 130 Faculty Office Building, P.O. Box 22363, Brigham Young University, Provo, Utah 84602|
Phone: (801) 422-2859
Fax: (801) 422-0194
Web page: https://economics.byu.edu/Pages/MacroLab/Home.aspx
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
- Milevsky, Moshe Arye & Posner, Steven E., 1998. "Asian Options, the Sum of Lognormals, and the Reciprocal Gamma Distribution," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 409-422, September.
- Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
- Charles J. Corrado, 2001. "Option pricing based on the generalized lambda distribution," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(3), pages 213-236, 03.
- James B. Mcdonald & Jeff Sorensen & Patrick A. Turley, 2013. "Skewness And Kurtosis Properties Of Income Distribution Models," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 59(2), pages 360-374, 06.
- Frank Fabozzi & Radu Tunaru & George Albota, 2009. "Estimating risk-neutral density with parametric models in interest rate markets," Quantitative Finance, Taylor & Francis Journals, vol. 9(1), pages 55-70.
- 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,
University of Chicago Press, vol. 78(3), pages 841-870, May.
- 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.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Bruce J. Sherrick & Philip Garcia & Viswanath Tirupattur, 1996. "Recovering probabilistic information from option markets: Tests of distributional assumptions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(5), pages 545-560, 08.
- McDonald, James B. & Turley, Patrick, 2011. "Distributional Characteristics: Just a Few More Moments," The American Statistician, American Statistical Association, vol. 65(2), pages 96-103.
When requesting a correction, please mention this item's handle: RePEc:byu:byumcl:201208. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kerk Phillips)
If references are entirely missing, you can add them using this form.