Skewed Generalized Error Distribution of Financial Assets and Option Pricing

Panayiotis Theodossiou, Cyprus University of Technology, Cyprus

This article investigates the empirical distributions of log-returns of several financial assets at the daily, weekly, monthly, bimonthly, and quarterly frequencies. The results indicate that the distributions possess significant skewness and leptokurtosis. These findings are attributed to strong higher-order moment dependencies which exist mainly in daily and weekly log-returns and prevent monthly, bimonthly, and quarterly log-returns from obeying the normality lawimplied by the central limit theorem. As a consequence, price changes do not follow the geometric Brownian motion often assumed in pricing options and other derivative assets. This article formally derives a skewed version of the Generalized Error Distribution (SGED) to model the empirical distribution of log-returns of financial assets and to price their call options. Under the assumptions of risk neutrality, normality of log-returns, and absence of arbitrage opportunities the SGED option-pricing model yields as special cases several well-known models for pricing options on stocks, stock indices, currencies, and currency futures.

Keywords: Call option pricing; financial data; geometric Brownian motion; leptokurtosis;Laplace distribution; SGED

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Trading Volume and Momentum: The International Evidence

Graham Bornholt, Griffith University, Australia
Paul Dou, Monash University, Australia
Mirela Malin, Griffith University, Australia

We investigate the role of trading volume in predicting the magnitude and persistence of the price momentum phenomenon in markets around the world. Using comprehensive data for 38,273 stocks from 37 countries, we show that past trading volume relates to both the level and persistence of momentum profits. The volume-based early stage momentum strategy outperforms the traditional momentum strategy in 34 out of 37 countries. In addition, we find evidence of a volume effect and we show that the degree of individualism in a country can explain the size of the volume effect in the markets investigated in this paper.

Keywords: early stage momentum; national culture; volume effect; turnover; individualism

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