Skewed Generalized Error Distribution of Financial Assets and Option Pricing

Panayiotis Theodossiou ()

Multinational Finance Journal, 2015, vol. 19, issue 4, 223-266

Abstract: This article provides a mathematical and empirical investigation of the reasons for the presence of skewness and kurtosis in financial data. The results indicate that this phenomenon is triggered by higher-order moment dependencies in the data, such as asymmetric and conditional volatility. Moreover, the article develops and tests successfully a skewed extension of the generalized error distribution (SGED), which is then used to model European call option prices. Under the standard assumptions of risk neutrality, normality of log-returns, and absence of arbitrage opportunities, the SGED model yields as special cases several well-known models for pricing options on stocks, stock indices, currencies, and currency futures.

Keywords: asymmetric volatility; call option pricing; conditional heteroskedasticity; geometric Brownian motion; skewed GED (search for similar items in EconPapers)
JEL-codes: C13 C22 G12 G13 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:mfj:journl:v:19:y:2015:i:4:p:223-266

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