Pricing European options with a log Student’s t-distribution: A Gosset formula

Daniel T. Cassidy, Michael J. Hamp and Rachid Ouyed

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 24, 5736-5748

Abstract: The distributions of returns for stocks are not well described by a normal probability density function (pdf). Student’s t-distributions, which have fat tails, are known to fit the distributions of the returns. We present pricing of European call or put options using a log Student’s t-distribution, which we call a Gosset approach in honour of W.S. Gosset, the author behind the nom de plume Student. The approach that we present can be used to price European options using other distributions and yields the Black–Scholes formula for returns described by a normal pdf.

Keywords: Econophysics; Financial risk; European options; Fat-tailed distributions; Student’s t-distribution (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:24:p:5736-5748

DOI: 10.1016/j.physa.2010.08.037

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