Skewed Generalized Error Distribution of Financial Assets and Option Pricing

Theodossiou, Panayiotis

Volume 19, Number 4 / December , Pages 223-313

Multinational Finance Journal, 2015, vol. 19, no. 4, pp. 223-266

Panayiotis Theodossiou , Cyprus University of Technology, Cyprus Corresponding Author

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
View in Bib TeX Format View Cite Format 1 View Cite Format 2