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Skewed Generalized Error Distribution of Financial Assets and Option Pricing

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  • Panayiotis Theodossiou

    (Cyprus University of Technology, Cyprus)

Abstract

This article provides a mathematical and empirical investigation of the reasons for the presence of skewness and kurtosis in financial data. The results indicate that this phenomenon is triggered by higher-order moment dependencies in the data, such as asymmetric and conditional volatility. Moreover, the article develops and tests successfully a skewed extension of the generalized error distribution (SGED), which is then used to model European call option prices. Under the standard assumptions of risk neutrality, normality of log-returns, and absence of arbitrage opportunities, the SGED model yields as special cases several well-known models for pricing options on stocks, stock indices, currencies, and currency futures.

Suggested Citation

  • Panayiotis Theodossiou, 2015. "Skewed Generalized Error Distribution of Financial Assets and Option Pricing," Multinational Finance Journal, Multinational Finance Journal, vol. 19(4), pages 223-266, December.
    • Handle: RePEc:mfj:journl:v:19:y:2015:i:4:p:223-266
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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric volatility; call option pricing; conditional heteroskedasticity; geometric Brownian motion; skewed GED;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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