 From Skews to a Skewed-tCyriel de Jong and Ronald Huisman ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam Abstract: In this paper we present a new methodology to infer the implied risk-neutral distribution function from European-style options. We introduce a skewed version of the Student-t distribution, whose main advantage is that its shape depends on only four parameters, of which two directly control for the levels of skewness and kurtosis. We can thus easily vary parameters to compare different distributions and use the parameters as inputs to price other options. We explain the method, provide some empirical results and compare them with the results of alternative models. The results indicate that our model provides a better fit to market prices of options than the Shimko or implied tree models, and has a lower computation time than most other models. We conclude that the skewed Student-t method provides a good alternative for European-style options. Keywords: implied distribution; implied volatility; options; skewness; student-t (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:21 Access Statistics for this paper More papers in ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam Contact information at EDIRC. |
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