Accounting for the impact of higher order moments in foreign equity option pricing model
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AbstractThis paper investigates the pricing of foreign equity option whose value depends on foreign equity prices and exchange rate. We assume that the underlying asset returns of foreign equity option is not a Brownian motion, and use the Gram-Charlier series expansion to augment a normal density with two additional terms to capture the effects of skewness and kurtosis. The empirical study shows that the higher order moments (skewness and kurtosis) clearly affect the estimated prices of foreign equity options. This approach enables us to capture more accurately the foreign equity option prices. (C) 2011 Elsevier B.V. All rights reserved.
All Author(s) ListXu WD, Wu CF, Li HY
Journal nameEconomic Modelling
Year2011
Month7
Day1
Volume Number28
Issue Number4
PublisherElsevier
Pages1726 - 1729
ISSN0264-9993
eISSN1873-6122
LanguagesEnglish-United Kingdom
KeywordsEuropean foreign equity option; Exchange rate; Gram-Charlier series; Higher order moments
Web of Science Subject CategoriesBusiness & Economics; Economics; ECONOMICS

Last updated on 2021-26-02 at 00:16