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Option Pricing Based On A Log–Skew–Normal Mixture

Author

Listed:
  • J. A. JIMÉNEZ

    (Department of Statistics, Universidad Nacional de Colombia, Carrera 30, No. 45-05, CP 111321, Bogotá, Colombia)

  • V. ARUNACHALAM

    (Department of Statistics, Universidad Nacional de Colombia, Carrera 30, No. 45-05, CP 111321, Bogotá, Colombia)

  • G. M. SERNA

    (Department of Business Studies, University of Alcalá de Henares, Plaza de la Victoria, 2, CP 28801, Alcalá de Henares (Madrid), España)

Abstract

This paper presents a method for approximating the underlying stock’s distribution by using a Log–Skew–Normal mixture distribution. The basic properties of a mixture of Skew–Normal distributions are reviewed in this paper. We provide a formula for the European option price by assuming that the log price follows a Skew–Normal mixture distribution. We also calculate the “Greeks”, such as delta, gamma and vega. We compare the proposed model with other existing models and consider an example of calibration to real market option data.

Suggested Citation

  • J. A. Jiménez & V. Arunachalam & G. M. Serna, 2015. "Option Pricing Based On A Log–Skew–Normal Mixture," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(08), pages 1-22, December.
    • Handle: RePEc:wsi:ijtafx:v:18:y:2015:i:08:n:s021902491550051x
    DOI: 10.1142/S021902491550051X
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    References listed on IDEAS

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