Effectiveness of the Skewness and Kurtosis Adjusted Black-Scholes Model in Pricing Australian Options

70 Pages Posted: 17 Aug 2020

See all articles by Yanrui Han

Yanrui Han

Tasmanian School of Business and Economics, University of Tasmania

Date Written: October 30, 2018

Abstract

This thesis investigates the predictive power of the Skewness and Kurtosis Adjusted Black Scholes model of Corrado and Su (1996) (CS) model in pricing three Australian option contracts (ANZ, BHP and CBA) maturing in March, June, September and December, during the 2007/2008 financial crisis period. Treating the Black Scholes model as a benchmark, we examine the effect of the CS model in order to determine which model better forecasts the observed call prices for the chosen three stocks. We observe that when we account for skewness and kurtosis of distribution of returns, the shape of the CS implied volatility smiles deviate noticeably from that of the BS implied volatilities for short, medium and long term duration. Particularly, for the ANZ September 2008 contracts we observe that the CS model outperforms the BS model in the short and medium term. However, this predictive power disappears in the long-term, signalling that for short and medium-term horizons skewness and kurtosis have significant effect which should not be ignored. The longer term on the other hand the effect of non-normal skewness and kurtosis does not play a role and the BS model outperforms the CS model. When one takes a closer look at the summary results for all the companies with each maturity the predictive power of the models is somewhat puzzling as on an average the BS model seems to outperform the CS model based on their MAE and MSE.

Keywords: Skewness, Kurtosis, Implied volatility, Black Scholes, Extended Black Scholes

JEL Classification: G12, G13 & G15

Suggested Citation

Han, Yanrui, Effectiveness of the Skewness and Kurtosis Adjusted Black-Scholes Model in Pricing Australian Options (October 30, 2018). Available at SSRN: https://ssrn.com/abstract=3653155 or http://dx.doi.org/10.2139/ssrn.3653155

Yanrui Han (Contact Author)

Tasmanian School of Business and Economics, University of Tasmania ( email )

Private Bag 84
Sandy Bay
Hobart, Tasmania 7001
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
26
Abstract Views
162
PlumX Metrics