OPTION PRICING BASED ON A LOG–SKEW–NORMAL MIXTURE

Jose Jimenez Moscoso, V. Arunachalam and G. M. Serna ()
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V. Arunachalam: Department of Statistics, Universidad Nacional de Colombia, Carrera 30, No. 45-05, CP 111321, Bogotá, Colombia
G. M. Serna: Department of Business Studies, University of Alcalá de Henares, Plaza de la Victoria, 2, CP 28801, Alcalá de Henares (Madrid), España

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 08, 1-22

Abstract: This paper presents a method for approximating the underlying stock’s distribution by using a Log–Skew–Normal mixture distribution. The basic properties of a mixture of Skew–Normal distributions are reviewed in this paper. We provide a formula for the European option price by assuming that the log price follows a Skew–Normal mixture distribution. We also calculate the “Greeks”, such as delta, gamma and vega. We compare the proposed model with other existing models and consider an example of calibration to real market option data.

Keywords: Asymmetry; kurtosis; skew normal mixtures distribution; non-normal; option pricing (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S021902491550051X

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