Header

UZH-Logo

Maintenance Infos

Closed form option pricing under generalized hermite expansions


Drimus, Gabriel G; Necula, Ciprian; Farkas, Walter (2013). Closed form option pricing under generalized hermite expansions. SSRN 2349868, University of Zurich.

Abstract

In this article, we generalize the classical Edgeworth series expansion used in the option pricing literature. We obtain a closed-form pricing formula for European options by employing a generalized Hermite expansion for the risk neutral density. The main advantage of the generalized expansion is that it can be applied to heavy-tailed return distributions, a case for which the standard Edgeworth expansions are not suitable. We also show how the expansion coefficients can be inferred directly from market option prices.

Abstract

In this article, we generalize the classical Edgeworth series expansion used in the option pricing literature. We obtain a closed-form pricing formula for European options by employing a generalized Hermite expansion for the risk neutral density. The main advantage of the generalized expansion is that it can be applied to heavy-tailed return distributions, a case for which the standard Edgeworth expansions are not suitable. We also show how the expansion coefficients can be inferred directly from market option prices.

Statistics

Downloads

3 downloads since deposited on 05 Mar 2015
2 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:European options, generalized Hermite series expansion, calibration
Language:English
Date:6 October 2013
Deposited On:05 Mar 2015 11:20
Last Modified:08 Dec 2017 11:51
Series Name:SSRN
Number of Pages:15
Related URLs:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2349868
http://ssrn.com/abstract=2349868
Other Identification Number:merlin-id:9331

Download