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Parametric Pricing of Higher Order Moments in S&p500 Options

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journal contribution
posted on 05.06.2017 by Lim, G.C., Martin, Gael M., Martin, V.L.
A general parametric framework is developed for pricing S&P500 options. Skewness and leptokurtosis in stock returns as well as time-varying volatility are priced. The parametric pricing model nests the Black-Scholes model and can explain volatility smiles and skews in stock options. The data consist of S&P500 options traded on select days in April, 1995, a total sample of over 500,000 observations. A number of performance criteria are used to evaluate the alternative models. The empirical results show that pricing higher order moments yield improvements in the pricing of options over the Black-Scholes model as well as other models.

History

Year of first publication

2002

Series

Department of Econometrics and Business Statistics

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