This paper revisits the pricing of options, in a context of financial stress, when the underlying asset’s returns displays skewness and excess kurtosis. For that purpose, we use a Cornish- Fisher transformation for valuing option contracts with an exact formula allowing for heavy- tails.
An application to the FTSE 100 stock index option contracts during October 2008 provides evidence about the capability of the Cornish-Fisher model to improve calibration and pricing performance during a period of stress.
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