The Performance of Skewness and Kurtosis Adjusted Option Pricing Model in Emerging Markets
PDF

Keywords

Black Scholes pricing Formula
Carrado-Su pricing Formula
Implied Parameters

How to Cite

Alp, Özge. (2016). The Performance of Skewness and Kurtosis Adjusted Option Pricing Model in Emerging Markets. International Journal of Finance & Banking Studies (2147-4486), 5(3), 70-84. https://doi.org/10.20525/ijfbs.v5i3.285

Abstract

In this study, the option pricing performance of the adjusted Black-Scholes model proposed by Corrado and Su (1996) and corrected by Brown and Robinson (2002), is investigated and compared with original Black Scholes pricing model for the Turkish derivatives market. The data consist of the European options written on BIST 30 index extends from January 02, 2015 to April 24, 2015 for given exercise prices with maturity April 30, 2015. In this period, the strike prices are ranging from 86 to 124. To compare the models, the implied parameters are derived by minimizing the sum of squared deviations between the observed and theoretical option prices. The implied distribution of BIST 30 index does not significantly deviate from normal distribution. In addition, pricing performance of Black Scholes model performs better in most of the time. Black Scholes pricing Formula, Carrado-Su pricing Formula, Implied Parameters

https://doi.org/10.20525/ijfbs.v5i3.285
PDF

References

Äijö, J. (2008). Impact of US and UK macroeconomic news announcements on the return distribution implied by FTSE-100 index options. International Review of Financial Analysis, Vol.17, (2), 242-258. doi:10.1016/j.irfa.2006.10.001

Akyapı, B. (2014). An analysis of BIST30 index options market. A thesis submitted to the Graduate School of Economics of Middle East Technical University, Ankara.

Andreous P. C., Charalambous, C. and Martzoukos, S. H. (2008). Pricing and trading European options by combining artificial neural networks and parametric models with implied parameters. European Journal of Operational Research. Vol.185, (3), 1415-1433. doi:10.1016/j.ejor.2005.03.081.

Aydın, K. (2002). Using EWMA and GARCH methods in value at risk calculations: Application on ISE-30 index. A thesis submitted to the Social Sciences Institute, Karaelmas University, Zonguldak.

Bekaert, G. and Harvey, C.R. (1997). Emerging equity market volatility. Journal of Financial Economics. Vol.43, 29-78. doi:10.1016/S0304-405X(96)00889-6.

Bekaert G., Erb, C. B., Harvey, C. R. Harvey, and Viskanta T. E. (1998). Distributional characteristics of emerging market returns and asset allocation. The Journal of Portfolio Management. Vol. 24, 102-116.

Beckers, S. (1981). Standard deviations implied in option prices as predictors of future stock price variability. Journal of Banking and Finance. Vol.5, (3), 363-381. doi:10.1016/0378-4266(81)90032-7.

Black, F. and Scholes M.S. (1973). The pricing of options and corporate liabilities. Journal of Political Economy. Vol.81, (3), 637-659.

Brown, C. A. and Robinson, D. M. (2002). Skewness and kurtosis implied by option prices: A correction. The Journal of Financial Research. Vol. 25, (2), 279-282

Corrado C. and T. Su, (1997). Implied volatility skews and stock index skewness and kurtosis implied by S&P 500 index option prices. Journal of Derivatives. Vol.4, (4), 8–19.

Demir S. and Tutek H. (2004). Pricing of options in emerging financial markets using martingale simulation: An example from Turkey. Computational Finance and Its Applications. Vol.38, 143-156.

Duan, C.J., Popova, I. and Ritchken P. (2002). Option pricing under regime switching. Quantitative Finance. Vol.2, 1-17. doi:10.1088/1469-7688/2/2/303.

Ersoy, E. and Bayrakdaroğlu, A. (2013). The lead-lag relationship between ISE 30 index and the TURKDEX-ISE 30 index futures contracts. İstanbul University Journal of the School of Business, Vol.42, (1), 26-40.

Fama, E. F. (1965). The behavior of stock market prices. Journal of Busines. Vol.38, 34-105.

Fuh, C.D., Ho, K. W. R., Inchi H. and Wang R. H. (2012). Option pricing with markov switching. Journal of Data Science. Vol.10, 483-509.

Gökgöz, F. and Sezgin-Alp, Ö. (2014). Can artificial neural networks be significant in predicting the Turkish stock market returns?. 13th EBES Conference - İstanbul June 5-7.

Harvey, C.R. (1995). Predictable risk and returns in emerging markets. Review of Financial Studies. Vol.8, 773- 816. doi: 10.1093/rfs/8.3.773

Heston, S. L. (1993). A closed-form solution for options with stochastic volatility with applications to bond and currency options. Oxford Journals Social Sciences Review of Financial Studies. Vol.6, (2), 327-343. doi: 10.1093/rfs/6.2.327.

Hull J. and White A. (1987). The pricing of options on assets with stochastic volatilities. Journal of Finance. Vol.42, (2), 281-300.

Jarrow, R. and Rudd, A. (1982). Approximate option valuation for arbitrary stochastic processes. Journal of Financial Economics. Vol.10, (3), 347-369. doi:10.1016/0304-405X(82)90007-1.

Blancard G. C., Jurczenko, E. and Maillet, B. (2001). The approximate option pricing model: performances and dynamic properties. Journal of Multinational Financial Management. Vol. 11, 427-443. doi:10.1016/S1042-444X(01)00031-7.

Jurczenko, E, Maillet, B. and Negrea, B. (2004). A note on skewness and kurtosis adjusted option pricing models under the Martingale restriction. Quantitative Finance. Vol.4, 479-488. doi:10.1080/14697680400020309

Kayalıdere, K. and Aktaş H. (2012). An examination of days-of-the-week effect and risk-return tradeoff in Turkish derivatives Exchange. Suleyman Demirel University The Journal of Faculty of Economics and Administrative Sciences. Vol.17, (3), 321-338.

Kou, S. G. (1999). A jump diffusion model for option pricing with three properties: Leptokurtic feature, volatility smile, and analytical tractability. IEEE/IAFE Conference on Computational Intelligence for Financial Engineering, Proceedings. 129-131.

Kou, S. G. (2002). A jump diffusion model for option pricing. Management Science.Vol.48, (8), 1086-110.

Latane H.A. and Rendleman, R.J. (1976). Standard deviations of stock price ratios implied in option prices. The Journal of Finance. Vol.31, (20), 369-381. doi: 10.2307/2326608.

MacBeth, J.D. and Merville L.J. (1979). An empirical examination of the Black-Scholes call option pricing model. Journal of Finance. Vol.34, 1173-1186. doi: 10.2307/2327242.

Mandelbrot, B. (1963). The variation of certain speculative prices. Journal of Business. Vol.36, 394-419. doi:10.1086/294632

Merton, R. H. (1976). Option pricing when underlying stock returns are discontinuous. Journal of Financial Economics. Vol.3, (2), 125-144. doi:10.1016/0304-405X(76)90022-2

Navatte, P. and Villa, C. (2000). The information content of implied volatility, skewness and kurtosis: Empirical evidence from long-term CAC40 options. European Financial Management. Vol.6, 41-56. doi: 10.1111/1468-036X.00110

Rudd, A. (1982). Approximate option valuation for arbitrary stochastic processes Robert Jarrow. Journal of Financial Economics. Vol.10, (3), 347-369

Saatçioğlu, C. and Karagül, İ. (2005), Usefulness of derivative instruments in emerging markets: Turkish experience. International Business and Economics Research Journal. Vol.4, (2) 37-46. doi:10.19030/iber.v4i2.3572

Schmanlensee R. and Trippi, R. (1978). Common stock volatility expectations implied by option premia. Journal of Finance, Vol.33, (1), 129-147.doi: 10.2307/2326355

Tokat, H. A. (2009). Re-examination of volatility dynamics in Istanbul Stock Exchange. Investment Management and Financial Innovations. Vol.6, (1), 192-198.

Vähämaa, S. (2003). Skewness and kurtosis adjusted Black-Scholes model: A note on hedging performance. Finance Letters. Vol.1, (5), 6-12.

Wiggins, J. B. (1987). Option values under stochastic volatility: Theory and empirical estimates. Journal of Financial Economics. Vol19, (2), 351-372. doi:10.1016/0304-405X(87)90009-2.

Whaley, R.E. (1982). Valuation of American call options on dividend-paying stocks: Empirical tests. Journal of Financial Economics. Vol.10, 29-58. doi:10.1016/0304-405X(82)90029-0

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.