Option pricing by probability distortion operator based on the quantile function

DOI10.1155/2019/5831569MaRDI QIDQ2298583zbMATH OpenOpenAlexWikidataFDO

Authors Gang Yang, Luogen Yao

Publication date 20 February 2020

Published in Mathematical Problems in Engineering (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.1155/2019/5831569

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Statistical methods; risk measures (91G70)

Review text

Summary: A new class of distortion operators based on quantile function is proposed for pricing options. It is shown that option prices obtained with our distortion operators are just the prices under mean correcting martingale measure in exponential Lévy models. In particular, Black-Scholes formula can be recuperated by our distortion operator. Simulation analysis shows that our distortion operator is superior to normal distortion operator and NIG distortion operator.

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Cites work

• A note on generalized inverses
• A Universal Framework for Pricing Financial and Insurance Risks
• An extension of the Wang transform derived from Bühlmann's economic premium principle for insurance risk
• Contingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theory
• On the Applicability of the Wang Transform for Pricing Financial Risks
• Option pricing when underlying stock returns are discontinuous
• Processes of normal inverse Gaussian type
• The normal inverse gaussian lévy process: simulation and approximation

Cited in

(1)

• A general class of distortion operators for pricing contingent claims with applications to CAT bonds

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