Option Pricing under Skewness and Kurtosis Using a Cornish Fisher Expansion
Université Paris XIII Nord - Department of Economics and Management
Conservatoire National des Arts et Métiers (CNAM); Amundi Asset Management
December 18, 2014
This paper revisits the pricing of options, in a context of financial stress, when the underlying asset’s returns displays skewness and excess kurtosis. For that purpose, we use a Cornish-Fisher transformation for valuing option contracts with an exact formula allowing for heavy-tails.
An application to the FTSE 100 stock index option contracts during October 2008 provides evidence about the capability of the Cornish-Fisher model to improve calibration and pricing performance during a volatile period.
Number of Pages in PDF File: 18
Keywords: Option pricing, Cornish-Fisher, Skewness, Kurtosis, Tail Risk
JEL Classification: C02, G11, G12, G21
Date posted: November 7, 2014 ; Last revised: June 21, 2015