Information inherent in implicit distributions

Abstract

Black (1976) model assumes a lognormal distribution for futures prices, and has been shown to misprice deep in-the-money and deep out-of-the-money futures options. in this paper, the jump-diffusion stochastic interest rates model developed by Doffou and Hilliard (1999a) is fitted to currency futures and futures options data to yield probabilistic information. The model implies non-normal skewness and kurtosis for the log of price relative, and prices currency futures options better than Bates' (1991) model and far better than Black's model.

Citation

Doffou, A. and Hilliard, J.E. (2001), "Information inherent in implicit distributions", Research in Finance (Research in Finance, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 195-220. https://doi.org/10.1016/S0196-3821(01)18008-1