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Option Pricing and Distribution Characteristics

Author

Listed:
  • David J. Mauler

    (Department of Economics, Brigham Young University)

  • James B. McDonald

    (Department of Economics, Brigham Young University)

Abstract

A number of flexible distributions (generalized beta of the second kind, inverse hyperbolic sine, g-and-h, Weibull, Burr-3, Burr-12, generalized gamma) are examined in the setting of option-pricing to explore potential improvements over the standard assumption of lognormal returns. Price formulas are presented specific to each assumed distributional form. The IHS option price formula has not previously been presented in the literature. An empirical application follows where implied risk-neutral density functions for each distribution are estimated from options on the S&P 500 Index. The distributions' performance relative to one another is then evaluated, with the GB2 appearing to be the most attractive choice.

Suggested Citation

  • David J. Mauler & James B. McDonald, 2012. "Option Pricing and Distribution Characteristics," BYU Macroeconomics and Computational Laboratory Working Paper Series 2012-08, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
    • Handle: RePEc:byu:byumcl:201208
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    References listed on IDEAS

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    Cited by:

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    2. Ariston Karagiorgis & Antonis Ballis & Konstantinos Drakos, 2024. "The Skewness‐Kurtosis plane for cryptocurrencies' universe," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2543-2555, April.

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    More about this item

    Keywords

    Option Pricing; Implied Distributions; Generalized Distributions;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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