JSM 2012 Home

JSM 2012 Online Program

The views expressed here are those of the individual authors and not necessarily those of the JSM sponsors, their officers, or their staff.

Online Program Home

Abstract Details

Activity Number: 662
Type: Contributed
Date/Time: Thursday, August 2, 2012 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract - #305694
Title: Option Pricing and Distribution Characteristics
Author(s): David Mauler*+ and James McDonald
Companies: Brigham Young University and Brigham Young University
Address: 1211 E Salem Canal Rd, Payson, UT, , United States
Keywords: Black-Scholes ; return distributions ; Inverse Hyperbolic Sine ; option pricing ; generalized distributions

The subject of extensive examination and research in financial literature, the Black-Scholes (B-S) option pricing model has inherent limitations which have been identified and corrected for with varying success. Foremost among these is its assumption of lognormal returns on the underlying asset-frequently shown in empirical studies to be invalid. In response to this, a series of efforts have been made to make use of other more flexible distributions. Following precedent set by papers which have investigated the GB2, Burr-3, Weibull, and g-and-h distributions in this setting, we evaluate the performance of the B-S model when assuming the Inverse Hyperbolic Sine (IHS) distribution. The IHS distribution has been shown to exhibit flexibility comparable to other generalized distributions, but has yet to be formally investigated in this setting. Our findings are consistent with previous studies, in that the B-S model prices options with greater accuracy when assuming the IHS rather than lognormal distribution. We use historical S&P 500 call option prices for our empirical evaluation, and include a comparison to previously examined general distributions in addition to the lognormal.

The address information is for the authors that have a + after their name.
Authors who are presenting talks have a * after their name.

Back to the full JSM 2012 program

2012 JSM Online Program Home

For information, contact jsm@amstat.org or phone (888) 231-3473.

If you have questions about the Continuing Education program, please contact the Education Department.