The effect of skewness and kurtosis on option pricing under non-normal distribution
Quarterly Journal of Securities Exchange

Quarterly Journal of Securities Exchange

The effect of skewness and kurtosis on option pricing under non-normal distribution

Document Type : Original Article

Authors
1 Financial Mathematics Department, Faculty of Basic Sciences, Ayatollah Borujerdi University, Borujerd, Iran.
2 Ph.D. Student, Department of Financial Mathematics, Ayatollah Boroujerdi University, Boroujerd, Iran
Abstract
The Black-Scholes model is used to price a wide range of options contracts. The basic assumption in this model is to follow the normal distribution of returns. But the reality of the market indicates the skewness and abnormal stretching of the data, which reduces the accuracy in calculating the option price. The main purpose of this research is to determine the price of European call option in data with non-normal skewness and kurtosis. In this regard, the option price has been determined in two models, Black Shoals and Gram-Charlier. For this purpose, the data of Iran Khodro in the period 2020-11-21 to 2022-12-14 and Shasta in the period 2022-7-25 to 2022-12-14 have been used. Hyper-skewness has been used for the first time in domestic financial literature in this research and it was shown that this factor increases the accuracy of option pricing. The results of this research show that the share of Shasta has more abnormal skewness and kurtosis than Iran Khodro. The option price calculated with the Gram-Charlier model shows a smaller error compared to the market price in the Shasta compared to the Black-Scholes model. Therefore, Gram-Charlie model has more flexibility than Black Shoals model with abnormal skewness and kurtosis
Keywords
Subjects

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