From Skews to a Skewed-T

14 Pages Posted: 20 Jan 2003

See all articles by Cyriel de Jong

Cyriel de Jong

Erasmus University Rotterdam (EUR) - Department of Financial Management; Erasmus Research Institute of Management (ERIM)

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: 18 2000 5,

Abstract

In this paper we present a new methodology to infer the implied risk-neutral distribution function from European-style options. We introduce a skewed version of the Student-t distribution, whose main advantage is that its shape depends on only four parameters, of which two directly control for the levels of skewness and kurtosis. We can thus easily vary parameters to compare different distributions and use the parameters as inputs to price other options. We explain the method, provide some empirical results and compare them with the results of alternative models. The results indicate that our model provides a better fit to market prices of options than the Shimko or implied tree models, and has a lower computation time than most other models. We conclude that the skewed Student-t method provides a good alternative for European-style options.

Keywords: options, implied volatility, implied distribution, student-t, skewness

JEL Classification: M, G13, C40

Suggested Citation

De Jong, Cyriel and Huisman, Ronald, From Skews to a Skewed-T (18 2000 5,). ERIM Report Series Reference No. ERS-2000-12-F&A. Available at SSRN: https://ssrn.com/abstract=370814

Cyriel De Jong (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2300 (Phone)
+31 10 408 9017 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
420
Abstract Views
2,377
rank
69,217
PlumX Metrics