Skewness and Stock Option Prices

Hans Gerber and Bruno Landry

North American Actuarial Journal, 1997, vol. 1, issue 3, 50-58

Abstract: In the classical Black-Scholes model, the logarithm of the stock price has a normal distribution, which excludes skewness. In this paper we consider models that allow for skewness. We propose an option-pricing formula that contains a linear adjustment to the Black-Scholes formula. This approximation is derived in the shifted Poisson model, which is a complete market model in which the exact option price has some undesirable features. The same formula is obtained in some incomplete market models in which it is assumed that the price of an option is defined by the Esscher method. For a European call option, the adjustment for skewness can be positive or negative, depending on the strike price.

Date: 1997
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DOI: 10.1080/10920277.1997.10595627

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