Binomial Option Pricing with Skewed Asset Returns

R Stafford Johnson, James E Pawlukiewicz and Jayesh M Mehta

Review of Quantitative Finance and Accounting, 1997, vol. 9, issue 1, 89-101

Abstract: This research presents method for estimating the parameters of the binomial option pricing model necessary to appropriately price calls on assets with asymmetric end-of-period return distributions. Parameters of the binomial model are shown to be a function of the mean, variance, and skewness of the underlying return distribution. It is also shown that failure to incorporate skewness results in the mispricing of the call. Copyright 1997 by Kluwer Academic Publishers

Date: 1997
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