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Hyperbolic Distributions in Finance
Ernst Eberlein and Ulrich Keller
Vol. 1, No. 3 (Sep., 1995), pp. 281-299
Published by: International Statistical Institute (ISI) and the Bernoulli Society for Mathematical Statistics and Probability
Stable URL: http://www.jstor.org/stable/3318481
Page Count: 19
You can always find the topics here!Topics: Finance, Stock prices, Gaussian distributions, Banks, Brownian motion, Financial securities, Prices, Martingales, Pricing, Statistical estimation
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Distributional assumptions for the returns on the underlying assets play a key role in valuation theories for derivative securities. Based on a data set consisting of daily prices of the 30 DAX shares over a three-year period, we investigate the distributional form of compound returns. After performing a number of statistical tests, it becomes clear that some of the standard assumptions cannot be justified. Instead, we introduce the class of hyperbolic distributions which can be fitted to the empirical returns with high accuracy. Two models based on hyperbolic Lévy motion are discussed. By studying the Esscher transform of the process with hyperbolic returns, we derive a valuation formula for derivative securities. The result suggests a correction of standard Black-Scholes pricing, especially for options close to expiration.
Bernoulli © 1995 Bernoulli Society for Mathematical Statistics and Probability