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

DOI10.1080/14697688.2012.744087MaRDI QIDQ5397462zbMATH OpenOpenAlexFDO

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

Publication date 20 February 2014

Published in Quantitative Finance (Search for Journal in Brave)

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

zbMATH Keywords

option pricingstochastic volatilityBlack-Scholes modelnon-Gaussian option pricingderivatives hedging

Mathematics Subject Classification ID

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

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.

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Cites work

• scientific article; zbMATH DE number 791392 (Why is no real title available?)
• scientific article; zbMATH DE number 3366863 (Why is no real title available?)
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• On Student's 1908 Article “The Probable Error of a Mean”
• Portfolio optimization for Student \(t\) and skewed \(t\) returns
• The Black-Scholes option pricing problem in mathematical finance: generalization and extensions for a large class of stochastic processes
• Theory of Financial Risk and Derivative Pricing

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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