Working Papers 2002 – Abstracts
Parametric Pricing of Higher Order Moments in S&P500 Options
G.C. Lim, G.M. Martin and V.L. Martin
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.
Keywords: Option Pricing; Volatility Smiles and Skews, Generalized
Student t, Skewness; Kurtosis; Time-Varying Volatility.
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