From skews to a skewed-t: modelling option-implied returns by a skewed student-t

Cyriel de Jong*, Ronald Huisman

*Corresponding author for this work

Research output: Chapter/Conference proceedingConference proceedingAcademicpeer-review

9 Citations (Scopus)

Abstract

One of the fundamental assumptions underlying the Black-Scholes formula is that risk-neutral expected returns on an asset are normally distributed. However, the existence of volatility skews indicates that market participants assume a different underlying distribution. Knowing this distribution reveals important information on changes in market perceptions, on how to value different options, and for comparing different (international) options. In this paper, a new methodology is presented with which the implied distribution can accurately and easily be inferred from market prices.

Original languageEnglish
Title of host publicationIEEE/IAFE Conference on Computational Intelligence for Financial Engineering, Proceedings (CIFEr)
Pages132-142
Number of pages11
Publication statusPublished - 2000
EventIEEE/IAFE/INFORNS 2000: 6th Conference on Computational Intelligence for Financial Engineering (CIFEr) - New York, NY, USA
Duration: 26 Mar 200028 Mar 2000

Publication series

SeriesIEEE/IAFE Conference on Computational Intelligence for Financial Engineering, Proceedings (CIFEr)

Conference

ConferenceIEEE/IAFE/INFORNS 2000: 6th Conference on Computational Intelligence for Financial Engineering (CIFEr)
CityNew York, NY, USA
Period26/03/0028/03/00

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