Option pricing under non-normality: a comparative analysis

Sharif Mozumder (), Ghulam Sorwar () and Kevin Dowd ()

Review of Quantitative Finance and Accounting, 2013, vol. 40, issue 2, 273-292

Abstract: This paper carries out a comparative analysis of the calibration and performance of a variety of options pricing models. These include Black and Scholes (J Polit Econ 81:637–659, 1973 ), the Gram–Charlier (GC) approach of Backus et al. ( 1997 ), the stochastic volatility (HS) model of Heston (Rev Financ Stud 6:327–343, 1993 ), the closed-form GARCH process of Heston and Nandi (Rev Financ Stud 13:585–625, 2000 ) and a variety of Lévy processes including the Variance Gamma (VG), Normal Inverse Gaussian (NIG), and, CGMY and Kou (Manag Sci 48:1086–1101, 2002 ) jump-diffusion models. Unlike most studies of option pricing, we compare these models using a common point-in-time data which reflects the perspective of a new investor who wishes to choose between models using only the most minimal recent data set. For each of these models, we also examine the accuracy of delta and delta-gamma approximations to the valuation of both individual options and an illustrative option portfolio. Copyright Springer Science+Business Media, LLC 2013

Keywords: GARCH pricing; Gram–Charlier pricing; Lévy pricing; Fast Fourier transform; C02 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s11156-011-0271-y

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