Gram-Charlier processes and applications to option pricing (Q1658066)
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English | Gram-Charlier processes and applications to option pricing |
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Gram-Charlier processes and applications to option pricing (English)
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14 August 2018
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Summary: A Gram-Charlier distribution has a density that is a polynomial times a normal density. For option pricing this retains the tractability of the normal distribution while allowing nonzero skewness and excess kurtosis. Properties of the Gram-Charlier distributions are derived, leading to the definition of a process with independent Gram-Charlier increments, as well as formulas for option prices and their sensitivities. A procedure for simulating Gram-Charlier distributions and processes is given. Numerical illustrations show the effect of skewness and kurtosis on option prices.
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