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General equilibrium and preference free model for pricing options under transformed gamma distribution

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  • Luiz Vitiello
  • Ser‐Huang Poon

Abstract

The gamma class of distributions encompasses several important distributions, either as special or limiting cases or through simple transformations. Here we derived closed form and preference free European option pricing formulae for various (transformed) gamma distributions under the general equilibrium RNVR framework. The gamma class of distributions is used historically in hydrology for modelling natural events. Our models can be used to price derivatives associated with these natural phenomena, which will help to encourage greater risk sharing through financial securitization. Our pricing formulae are theoretically sound even if the underlyings and the derivative instruments are not (frequently) traded. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:409–431, 2010

Suggested Citation

  • Luiz Vitiello & Ser‐Huang Poon, 2010. "General equilibrium and preference free model for pricing options under transformed gamma distribution," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(5), pages 409-431, May.
    • Handle: RePEc:wly:jfutmk:v:30:y:2010:i:5:p:409-431
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    Cited by:

    1. Luiz Vitiello & Ser-Huang Poon, 2022. "Option pricing with random risk aversion," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1665-1684, May.
    2. Chang, Chuang-Chang & Tsay, Min-Hung & Lin, Jun-Biao, 2018. "A generalized Brennan–Rubinstein approach for valuing options with stochastic interest rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 92-99.
    3. Raj Kumari Bahl & Sotirios Sabanis, 2016. "Model-Independent Price Bounds for Catastrophic Mortality Bonds," Papers 1607.07108, arXiv.org, revised Dec 2020.
    4. Bahl, Raj Kumari & Sabanis, Sotirios, 2021. "Model-independent price bounds for Catastrophic Mortality Bonds," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 276-291.
    5. Luiz Vitiello & Ivonia Rebelo, 2015. "A note on the pricing of multivariate contingent claims under a transformed-gamma distribution," Review of Derivatives Research, Springer, vol. 18(3), pages 291-300, October.

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