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Gram-Charlier expansions and option pricing
Gram-Charlier expansions provide a tractable way of fitting risk-neutral distributions to asset prices. This allows the model to capture skewness, excess kurtosis and higher moments in observed asset returns. Schlogl (2013) proposes a calibration method to ensure the fitted densities are valid and a...
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| Format: | Thesis |
| Language: | English |
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Department of Finance and Tax
2022
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| _version_ | 1867613924120068096 |
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| access_status_str | Open Access |
| author | Knipe, Joshua |
| author2 | Ouwehand, Peter |
| author_browse | Knipe, Joshua Ouwehand, Peter |
| author_facet | Ouwehand, Peter Knipe, Joshua |
| author_sort | Knipe, Joshua |
| collection | Thesis |
| description | Gram-Charlier expansions provide a tractable way of fitting risk-neutral distributions to asset prices. This allows the model to capture skewness, excess kurtosis and higher moments in observed asset returns. Schlogl (2013) proposes a calibration method to ensure the fitted densities are valid and arbitrage free. This method is implemented with standard foreign exchange options and gives an exact fit when enough moments are included in the calibration process. GramCharlier expansions also result in analytic solutions for many exotic option prices through an extremely general framework. This relies on representing an option as a portfolio of the M-binaries defined by Skipper and Buchen (2003). Geometric Asian options are priced using this approach and compared to the corresponding Black-Scholes prices. Numerical examples highlight the effect skewness and excess kurtosis can have on these option prices, particularly for options that are out-the-money. Gram-Charlier distributions are also combined with Monte Carlo simulations to estimate option prices for calls and geometric Asian options. The results show convergence to the analytical solutions for all cases. Additionally, Gram-Charlier estimates for arithmetic Asian options are calculated and compared to Black-Scholes estimates. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/36472 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:43:52.396Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2022 |
| publishDateRange | 2022 |
| publishDateSort | 2022 |
| publisher | Department of Finance and Tax |
| publisherStr | Department of Finance and Tax |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/36472 Gram-Charlier expansions and option pricing Knipe, Joshua Ouwehand, Peter Mc Walter, Thomas finance and tax Gram-Charlier expansions provide a tractable way of fitting risk-neutral distributions to asset prices. This allows the model to capture skewness, excess kurtosis and higher moments in observed asset returns. Schlogl (2013) proposes a calibration method to ensure the fitted densities are valid and arbitrage free. This method is implemented with standard foreign exchange options and gives an exact fit when enough moments are included in the calibration process. GramCharlier expansions also result in analytic solutions for many exotic option prices through an extremely general framework. This relies on representing an option as a portfolio of the M-binaries defined by Skipper and Buchen (2003). Geometric Asian options are priced using this approach and compared to the corresponding Black-Scholes prices. Numerical examples highlight the effect skewness and excess kurtosis can have on these option prices, particularly for options that are out-the-money. Gram-Charlier distributions are also combined with Monte Carlo simulations to estimate option prices for calls and geometric Asian options. The results show convergence to the analytical solutions for all cases. Additionally, Gram-Charlier estimates for arithmetic Asian options are calculated and compared to Black-Scholes estimates. 2022-06-20T08:30:32Z 2022-06-20T08:30:32Z 2022 2022-06-20T08:29:07Z Master Thesis Masters MPhil http://hdl.handle.net/11427/36472 eng application/pdf Department of Finance and Tax Faculty of Commerce |
| spellingShingle | finance and tax Knipe, Joshua Gram-Charlier expansions and option pricing |
| thesis_degree_str | Master's |
| title | Gram-Charlier expansions and option pricing |
| title_full | Gram-Charlier expansions and option pricing |
| title_fullStr | Gram-Charlier expansions and option pricing |
| title_full_unstemmed | Gram-Charlier expansions and option pricing |
| title_short | Gram-Charlier expansions and option pricing |
| title_sort | gram charlier expansions and option pricing |
| topic | finance and tax |
| url | http://hdl.handle.net/11427/36472 |
| work_keys_str_mv | AT knipejoshua gramcharlierexpansionsandoptionpricing |