Publicação: Testing option pricing with the Edgeworth expansion
Nenhuma Miniatura disponível
Data
2004-12-15
Autores
Orientador
Coorientador
Pós-graduação
Curso de graduação
Título da Revista
ISSN da Revista
Título de Volume
Editor
Elsevier B.V.
Tipo
Artigo
Direito de acesso
Acesso restrito
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.
Descrição
Palavras-chave
Idioma
Inglês
Como citar
Physica A-statistical Mechanics and Its Applications. Amsterdam: Elsevier B.V., v. 344, n. 3-4, p. 484-490, 2004.