Alternative option pricing models incorporating higher moments and non-restrictive distributions
A new method of inferring moments of risk-neutral probability density function that is consistent with the traded option prices is developed. Incorporating the market inferred moments of the risk-neutral probability density function is a practical way to overcome the need for using different volatil...
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| Format: | Theses and Dissertations |
| Language: | English |
| Published: |
2008
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| Online Access: | http://hdl.handle.net/10356/7245 |
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| Institution: | Nanyang Technological University |
| Language: | English |
| Summary: | A new method of inferring moments of risk-neutral probability density function that is consistent with the traded option prices is developed. Incorporating the market inferred moments of the risk-neutral probability density function is a practical way to overcome the need for using different volatility inputs into "Black-Scholes" types of models for option differing in strike and maturity. The new method utilized Gram-Charlier expansion series to account for the higher moments of the asset's return probability density, and Rubinstein's (1994) optimization method to infer the moments of the risk-neutral probabilities. This moment pricing method contains Black-Scholes model as a special case- when the third and higher moments are set to zero. |
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