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. Financial Markets Group Discussion Papers (419). Financial Markets Group, The London School of Economics and Political Science, London, UK.

Preview

PDF - Published Version Download (526kB) | Preview

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.ac.uk
Additional Information:	© 2002 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	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
Date Deposited:	20 Aug 2009 12:26
Last Modified:	11 Dec 2024 18:32
URI:	http://eprints.lse.ac.uk/id/eprint/24938

Actions (login required)

View Item