Gram-Charlier Processes and Applications to Option Pricing

Jean-Pierre Chateau and Daniel Dufresne

Journal of Probability and Statistics, 2017, vol. 2017, 1-19

Abstract:

A Gram-Charlier distribution has a density that is a polynomial times a normal density. For option pricing this retains the tractability of the normal distribution while allowing nonzero skewness and excess kurtosis. Properties of the Gram-Charlier distributions are derived, leading to the definition of a process with independent Gram-Charlier increments, as well as formulas for option prices and their sensitivities. A procedure for simulating Gram-Charlier distributions and processes is given. Numerical illustrations show the effect of skewness and kurtosis on option prices.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnljps:8690491

DOI: 10.1155/2017/8690491

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