Investigation of non-Gaussian effects in the Brazilian option market

William O. Sosa-Correa, Antônio M.T. Ramos and Giovani L. Vasconcelos

Physica A: Statistical Mechanics and its Applications, 2018, vol. 496, issue C, 525-539

Abstract: An empirical study of the Brazilian option market is presented in light of three option pricing models, namely the Black–Scholes model, the exponential model, and a model based on a power law distribution, the so-called q-Gaussian distribution or Tsallis distribution. It is found that the q-Gaussian model performs better than the Black–Scholes model in about one third of the option chains analyzed. But among these cases, the exponential model performs better than the q-Gaussian model in 75% of the time. The superiority of the exponential model over the q-Gaussian model is particularly impressive for options close to the expiration date, where its success rate rises above ninety percent.

Keywords: Option pricing; Non-Gaussian option models; Power law distribution; Exponential distribution (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:496:y:2018:i:c:p:525-539

DOI: 10.1016/j.physa.2017.12.115

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