Option Pricing under Skewness and Kurtosis Using a Cornish Fisher Expansion
18 Pages Posted: 7 Nov 2014 Last revised: 21 Jun 2015
Date Written: 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.
Keywords: Option pricing, Cornish-Fisher, Skewness, Kurtosis, Tail Risk
JEL Classification: C02, G11, G12, G21
Suggested Citation: Suggested Citation