Option Pricing under Skewness and Kurtosis Using a Cornish Fisher Expansion

18 Pages Posted: 7 Nov 2014 Last revised: 21 Jun 2015

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Didier Maillard

Conservatoire National des Arts et Métiers (CNAM); Amundi Asset Management

Date Written: December 18, 2014

Abstract

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

Aboura, Sofiane and Maillard, Didier, Option Pricing under Skewness and Kurtosis Using a Cornish Fisher Expansion (December 18, 2014). Available at SSRN: https://ssrn.com/abstract=2520032 or http://dx.doi.org/10.2139/ssrn.2520032

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Didier Maillard (Contact Author)

Conservatoire National des Arts et Métiers (CNAM) ( email )

292, rue Saint-Martin
Paris cedex 03, 75141
France

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

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