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Skewness and kurtosis implied by option prices: a second comment

Jurczenko, Emmanuel, Maillet, Bertrand and Negrea, Bogdan (2002) Skewness and kurtosis implied by option prices: a second comment. Discussion paper, 419. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

Several authors have proposed series expansion methods to price options when the risk-neutral density is asymmetric and leptokurtic. Among these, Corrado and Su (1996) provide an intuitive pricing formula based on a Gram-Charlier Type A series expansion. However, their formula contains a typographic error that can be signi…cant. Brown and Robinson (2002) correct their pricing formula and provide an example of economic signi…cance under plausible market conditions. The purpose of this comment is to slightly modify their pricing formula to provide consistency with a martingale restriction. We also compare the sensitivities of option prices to shifts in skewness and kurtosis using parameter values from Corrado- Su (1996) and Brown-Robinson (2002), and market data from the French options market. We show that di¤erences between the original, corrected, and our modi…ed versions of the Corrado-Su (1996) original model are minor on the whole sample, but could be economically significant in speci…c cases, namely for long maturity and far-from-the-money options when markets are turbulent.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2002 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 419
Date Deposited: 20 Aug 2009 12:26
URL: http://eprints.lse.ac.uk/24938/

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