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Skewness Versus Kurtosis: Implications for Pricing and Hedging Options
Author(s) -
Kim Sol,
Lee Geul,
Park Yuen Jung
Publication year - 2017
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12200
Subject(s) - kurtosis , skewness , econometrics , valuation of options , economics , financial economics , mathematics , statistics
We examine the relative influence of the skewness and kurtosis of option‐implied risk‐neutral density on pricing and hedging performance in the S&P 500 Index options market. We find that skewness exerts a greater impact on pricing and hedging errors than kurtosis. The model that considers skewness shows better performance for pricing and hedging options than the model that only considers kurtosis. Our results are consistent, even when the underlying return is extremely high or low, as well as for options on individual stocks. Overall, risk‐neutral skewness is more important than risk‐neutral kurtosis for pricing and hedging options.