Parametric Pricing of Higher Order Moments in S&P500 Options

Guay C. Lim (), G.M. Martin () and V.L. Martin
Authors registered in the RePEc Author Service: Vance Lindsay Martin and Gael Margaret Martin

No 1/02, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: A general parametric framework is developed for pricing S&P500 options. Skewness and leptokurtosis in stock returns as well as time-varying volatility are priced. The parametric pricing model nests the Black-Scholes model and can explain volatility smiles and skews in stock options. The data consist of S&P500 options traded on select days in April, 1995, a total sample of over 500,000 observations. A number of performance criteria are used to evaluate the alternative models. The empirical results show that pricing higher order moments yield improvements in the pricing of options over the Black-Scholes model as well as other models.

Keywords: Option Pricing; Volatility Smiles and Skews; Generalized Student t; Skewness; Kurtosis; Time-Varying Volatility. (search for similar items in EconPapers)
JEL-codes: C13 C51 C52 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-fmk
Date: 2002-02
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Related works:
Journal Article: Parametric pricing of higher order moments in S&P500 options (2005)
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