Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Parity Analysis of Non-log Normality of Black-Scholes & Its
Inter-competence
Vipul Kumar Singh
Enforced by the empirical deficiencies of the Black-Scholes and its wrong distributional
assumption, researchers provoked to pursuit the development of more realistic option
pricing models encompassing the level of skewness and kurtosis. Therefore, the objective of
this paper is multi-fold. The first and foremost objective is to investigate the Black-Scholes
assumption of log-normality of the underlying asset return density with constant volatility.
The second relative objective is to testify the comparative competitiveness of impeccable
models capable of incorporating log non-normality explaining smile phenomenon of option
pricing. Though the option pricing models is a combination of numerous models but to
provide a focused approach we banked upon the three most dominant models of this
species named as Jarrow-Rudd, Carrado-Su, and Gram-Charlier. To testify the price
effectiveness of models we inter-passed these across meticulously collected data of the
most unsteady period of Indian financial frame. Besides that, the paper also investigates the
information content of three crucial parameters namely volatility smile, skewness and
kurtosis.
Keyword: Black-Scholes, Call, Carrado-Su, Gram-Charlier, Implied, Jarrow-Rudd,
Kurtosis, Nifty, Options, Skewness, Volatility.
JEL Classification: C2, C14, C53, G13, G17
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Dr. Vipul Kumar Singh, Assistant Professor, Institute of Management Technology, 35 Km Milestone, Katol
Road, Nagpur - 441502, INDIA, E-mail: vksingh@imtnag.ac.in