Skewness and kurtosis adjusted model in pricing FTSE 100 index options
Nevalainen, Kari (2005)
Kuvaus
Kokotekstiversiota ei ole saatavissa.
Tiivistelmä
The purpose of this study is to compare the pricing ability of the benchmark Black-Scholes option pricing model and skewness and kurtosis adjusted option pricing model derived by Corrado & Su (1996b) to see if the skewness and kurtosis adjusted model performs better in pricing call options traded on the London International Financial Futures and Options Exchange (LIFFE).
The hypothesis of this study is that the skewness and kurtosis adjusted model derived by Corrado & Su (1996b) predicts call option prices better than the traditional Black-Scholes model. The hypothesis is based on the earlier studies introduced in this study that showed similar results and in the fact that volatility of the underlying asset price is one of the primary determinants of option prices and an option pricing model that does not properly capture the evolution of volatility process can give rise to option prices that do not agree well with prices observed in the market.
This study uses mathematical program Matlab in order to estimate implied volatilitiy (IV), implied skewness (IS) and implied kurtosis (IK) on a weekly basis and in order to calculate the theoretical option prices. After calculating both, the Black-Scholes and the skewness and kurtosis adjusted option prices, the pricing biases are defined regarding to the actual call price. Three different pricing biases are calculated: price difference, absolute price difference and relative pricing bias.
As a conclusion we can argue that both models cannot explain option prices consistently across all the sample periods and the empirical test results are mixed. As summary, it can be concluded that skewness and kurtosis adjustment terms added to the Black-Scholes formula yield significantly improved accuracy for pricing European call options on the FTSE 100 Index.
The hypothesis of this study is that the skewness and kurtosis adjusted model derived by Corrado & Su (1996b) predicts call option prices better than the traditional Black-Scholes model. The hypothesis is based on the earlier studies introduced in this study that showed similar results and in the fact that volatility of the underlying asset price is one of the primary determinants of option prices and an option pricing model that does not properly capture the evolution of volatility process can give rise to option prices that do not agree well with prices observed in the market.
This study uses mathematical program Matlab in order to estimate implied volatilitiy (IV), implied skewness (IS) and implied kurtosis (IK) on a weekly basis and in order to calculate the theoretical option prices. After calculating both, the Black-Scholes and the skewness and kurtosis adjusted option prices, the pricing biases are defined regarding to the actual call price. Three different pricing biases are calculated: price difference, absolute price difference and relative pricing bias.
As a conclusion we can argue that both models cannot explain option prices consistently across all the sample periods and the empirical test results are mixed. As summary, it can be concluded that skewness and kurtosis adjustment terms added to the Black-Scholes formula yield significantly improved accuracy for pricing European call options on the FTSE 100 Index.