Vitiello, L and Poon, S (2014) Non-monotonic pricing kernel and an extended class of mixture of distributions for option pricing. Review of Derivatives Research, 17 (2). pp. 241-259. DOI https://doi.org/10.1007/s11147-013-9093-5
Vitiello, L and Poon, S (2014) Non-monotonic pricing kernel and an extended class of mixture of distributions for option pricing. Review of Derivatives Research, 17 (2). pp. 241-259. DOI https://doi.org/10.1007/s11147-013-9093-5
Vitiello, L and Poon, S (2014) Non-monotonic pricing kernel and an extended class of mixture of distributions for option pricing. Review of Derivatives Research, 17 (2). pp. 241-259. DOI https://doi.org/10.1007/s11147-013-9093-5
Abstract
We derive closed form European option pricing formulae under the general equilibrium framework for underlying assets that have an N -mixture of transformed normal distributions. The component distributions need not belong to the same class but must all be transformed normal. An important implication of our results is that the mixture of distributions is consistent with a ?what appears to be abnormal? non-monotonic (asset specific) pricing kernel for the S&P 500 and that the representative agent has a ?logical? monotonic decreasing marginal utility. We show that a mixture of two lognormal distributions is sufficient to produce this result and also implied volatility smiles of a wide variety of shapes.
Item Type: | Article |
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Uncontrolled Keywords: | Mixture of distributions; Transformed-normal distribution; Risk neutral valuation relationship; Option pricing; G13 |
Subjects: | H Social Sciences > HG Finance |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 11 Nov 2014 10:41 |
Last Modified: | 30 Oct 2024 21:20 |
URI: | http://repository.essex.ac.uk/id/eprint/11263 |