Log Student's t-distribution-based option sensitivities: Greeks for the Gosset formulae

DOI10.1080/14697688.2012.744087zbMATH Open1281.91153arXiv1003.1344OpenAlexW2030823765MaRDI QIDQ5397462FDOQ5397462

Authors: Daniel T. Cassidy, Michael J. Hamp, R. Ouyed 

Publication date: 20 February 2014

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: European options can be priced when returns follow a Student's t-distribution, provided that the asset is capped in value or the distribution is truncated. We call pricing of options using a log Student's t-distribution a Gosset approach, in honour of W.S. Gosset. In this paper, we compare the greeks for Gosset and Black-Scholes formulae and we discuss implementation. The t-distribution requires a shape parameter

u to match the "fat tails" of the observed returns. For large

u, the Gosset and Black-Scholes formulae are equivalent. The Gosset formulae removes the requirement that the volatility be known, and in this sense can be viewed as an extension of the Black-Scholes formula.

Full work available at URL: https://arxiv.org/abs/1003.1344

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zbMATH Keywords

option pricingstochastic volatilityBlack-Scholes modelnon-Gaussian option pricingderivatives hedging

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Cites Work

• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• Title not available (Why is that?)
• On Student's 1908 Article “The Probable Error of a Mean”
• Theory of Financial Risk and Derivative Pricing
• The Black-Scholes option pricing problem in mathematical finance: generalization and extensions for a large class of stochastic processes
• Title not available (Why is that?)
• Portfolio optimization for Student \(t\) and skewed \(t\) returns

Cited In (3)

• Some Inferential Problems from Log Student’s T-distribution and its Multivariate Extension
• A comparison of the GB2 and skewed generalized log-t distributions with an application in finance
• Option pricing with heavy-tailed distributions of logarithmic returns

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