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Corrado and Su (1996) European Option Prices

version (2.84 KB) by Semin Ibisevic
Compute European put and call option prices using the Corrado and Su (1996) model.

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Updated 29 Apr 2013

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This method explicitly allows for excess skewness and kurtosis in an expanded Black-Scholes option pricing formula.

The approach adapts a Gram-Charlier series expansions of the standard normal density function to yield an option price formula that is the sum of a Black–Scholes option price plus adjustment terms for nonnormal skewness and kurtosis (Corrado and Su, 1997).

For skewness = 0 and kurtosis = 3, the Corrado-Su option prices are equal to the prices obtained using the Black and Scholes (1973) model.

Corrado, C.J., and Su T. Skewness and kurtosis in S&P 500 Index returns implied by option prices. Financial Research 19:175–92, 1996.

Corrado, C.J., and Su T. Implied volatility skews and stock return skewness and kurtosis implied by stock option prices. European Journal of Finance 3:73–85, 1997.

Hull, J.C., "Options, Futures, and Other Derivatives", Prentice Hall, 5th edition, 2003.

Luenberger, D.G., "Investment Science", Oxford Press, 1998.

Comments and Ratings (2)

There is an error in Corrado's hermite polynomials, which are incomplete and should start with: Hermite(x)=(-1)^n...

MATLAB Release Compatibility
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