scholarly journals Empirical Study of the Effect of Including Skewness and Kurtosis in Black Scholes Option Pricing Formula on S&P CNX Nifty Index Options

2007 ◽  
Author(s):  
Rritu Saurabha ◽  
Manvendra Tiwari
Keyword(s):  
Empirical Study ◽  
Option Pricing ◽  
Index Options ◽  
Black Scholes ◽  
Skewness And Kurtosis ◽  
Pricing Formula

Derivative Assets Analysis

1987 ◽  
Vol 1 (2) ◽  
pp. 73-93 ◽  
Author(s):  
Mark Rubinstein
Keyword(s):  
Economic Theory ◽  
Economic Analysis ◽  
Option Pricing ◽  
Portfolio Insurance ◽  
Equity Options ◽  
Index Options ◽  
Index Futures ◽  
The Core ◽  
Black Scholes ◽  
Pricing Formula

Derivative assets analysis enjoys an unusual status; it is a recently developed, relatively complex tool of economic analysis, faithful to the core of economic theory, and widely used to make reallife decisions. This paper, discusses derivative assets based on buy-and-hold strategies; derivative assets based on dynamic replicating strategies; valuing and replicating other derivative assets; and the Black-Scholes option pricing formula. Then it takes a detailed look at four applications: index futures, equity options, index options, and portfolio insurance.

scholarly journals The Performance of Skewness and Kurtosis Adjusted Option Pricing Model in Emerging Markets

2016 ◽  
Vol 5 (3) ◽  
pp. 70-84
Author(s):  
Özge Sezgin Alp
Keyword(s):  
Emerging Markets ◽  
Option Pricing ◽  
Option Prices ◽  
Pricing Model ◽  
European Options ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Option Pricing Model ◽  
Skewness And Kurtosis ◽  
Pricing Formula

In this study, the option pricing performance of the adjusted Black-Scholes model proposed by Corrado and Su (1996) and corrected by Brown and Robinson (2002), is investigated and compared with original Black Scholes pricing model for the Turkish derivatives market. The data consist of the European options written on BIST 30 index extends from January 02, 2015 to April 24, 2015 for given exercise prices with maturity April 30, 2015. In this period, the strike prices are ranging from 86 to 124. To compare the models, the implied parameters are derived by minimizing the sum of squared deviations between the observed and theoretical option prices. The implied distribution of BIST 30 index does not significantly deviate from normal distribution. In addition, pricing performance of Black Scholes model performs better in most of the time. Black Scholes pricing Formula, Carrado-Su pricing Formula, Implied Parameters

AN ANALYTICAL OPTION PRICING FORMULA FOR MEAN-REVERTING ASSET WITH TIME-DEPENDENT PARAMETER

2021 ◽  
Vol 63 (2) ◽  
pp. 178-202
Author(s):  
P. NONSOONG ◽  
K. MEKCHAY ◽  
S. RUJIVAN
Keyword(s):  
Option Pricing ◽  
Option Price ◽  
Time Dependent ◽  
Initial Time ◽  
Agricultural Commodity ◽  
Time Integral ◽  
Long Run ◽  
Black Scholes ◽  
Dependent Parameter ◽  
Pricing Formula

AbstractWe present an analytical option pricing formula for the European options, in which the price dynamics of a risky asset follows a mean-reverting process with a time-dependent parameter. The process can be adapted to describe a seasonal variation in price such as in agricultural commodity markets. An analytical solution is derived based on the solution of a partial differential equation, which shows that a European option price can be decomposed into two terms: the payoff of the option at the initial time and the time-integral over the lifetime of the option driven by a time-dependent parameter. Finally, results obtained from the formula have been compared with Monte Carlo simulations and a Black–Scholes-type formula under various kinds of long-run mean functions, and some examples of option price behaviours have been provided.

An empirical exploration of the performance of alternative option pricing models

2019 ◽  
Vol 11 (1) ◽  
pp. 23-49
Author(s):  
Aparna Prasad Bhat
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Emerging Market ◽  
Pricing Models ◽  
Content Type ◽  
Black Scholes ◽  
Out Of Sample ◽  
Hedging Performance ◽  
Practical Implications ◽  
Skewness And Kurtosis

PurposeThe purpose of this paper is to ascertain the effectiveness of major deterministic and stochastic volatility-based option pricing models in pricing and hedging exchange-traded dollar–rupee options over a five-year period since the launch of these options in India.Design/methodology/approachThe paper examines the pricing and hedging performance of five different models, namely, the Black–Scholes–Merton model (BSM), skewness- and kurtosis-adjusted BSM, NGARCH model of Duan, Heston’s stochastic volatility model and anad hocBlack–Scholes (AHBS) model. Risk-neutral structural parameters are extracted by calibrating each model to the prices of traded dollar–rupee call options. These parameters are used to generate out-of-sample model option prices and to construct a delta-neutral hedge for a short option position. Out-of-sample pricing errors and hedging errors are compared to identify the best-performing model. Robustness is tested by comparing the performance of all models separately over turbulent and tranquil periods.FindingsThe study finds that relatively simpler models fare better than more mathematically complex models in pricing and hedging dollar–rupee options during the sample period. This superior performance is observed to persist even when comparisons are made separately over volatile periods and tranquil periods. However the more sophisticated models reveal a lower moneyness-maturity bias as compared to the BSM model.Practical implicationsThe study concludes that incorporation of skewness and kurtosis in the BSM model as well as the practitioners’ approach of using a moneyness-maturity-based volatility within the BSM model (AHBS model) results in better pricing and hedging effectiveness for dollar–rupee options. This conclusion has strong practical implications for market practitioners, hedgers and regulators in the light of increased volatility in the dollar–rupee pair.Originality/valueExisting literature on this topic has largely centered around either US equity index options or options on major liquid currencies. While many studies have solely focused on the pricing performance of option pricing models, this paper examines both the pricing and hedging performance of competing models in the context of Indian currency options. Robustness of findings is tested by comparing model performance across periods of stress and tranquility. To the best of the author’s knowledge, this paper is one of the first comprehensive studies to focus on an emerging market currency pair such as the dollar–rupee.

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