Testing option pricing with the Edgeworth expansion
Contribuinte(s) |
Universidade Estadual Paulista (UNESP) |
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Data(s) |
20/05/2014
20/05/2014
15/12/2004
|
Resumo |
There is a well-developed framework, the Black-Scholes theory, for the pricing of contracts based on the future prices of certain assets, called options. This theory assumes that the probability distribution of the returns of the underlying asset is a Gaussian distribution. However, it is observed in the market that this hypothesis is flawed, leading to the introduction of a fudge factor, the so-called volatility smile. Therefore, it would be interesting to explore extensions of the Black-Scholes theory to non-Gaussian distributions. In this paper, we provide an explicit formula for the price of an option when the distributions of the returns of the underlying asset is parametrized by an Edgeworth expansion, which allows for the introduction of higher independent moments of the probability distribution, namely skewness and kurtosis. We test our formula with options in the Brazilian and American markets, showing that the volatility smile can be reduced. We also check whether our approach leads to more efficient hedging strategies of these instruments. (C) 2004 Elsevier B.V. All rights reserved. |
Formato |
484-490 |
Identificador |
http://dx.doi.org/10.1016/j.physa.2004.06.018 Physica A-statistical Mechanics and Its Applications. Amsterdam: Elsevier B.V., v. 344, n. 3-4, p. 484-490, 2004. 0378-4371 http://hdl.handle.net/11449/23944 10.1016/j.physa.2004.06.018 WOS:000225129100018 |
Idioma(s) |
eng |
Publicador |
Elsevier B.V. |
Relação |
Physica A: Statistical Mechanics and Its Applications |
Direitos |
closedAccess |
Palavras-Chave | #option pricing #non-gaussian distribution |
Tipo |
info:eu-repo/semantics/article |