dew {RND} | R Documentation |
Edgeworth Density
Description
dew
is the probability density function implied by the Edgeworth expansion method.
Usage
dew(x, r, y, te, s0, sigma, skew, kurt)
Arguments
x |
value at which the denisty is to be evaluated |
r |
risk free rate |
y |
dividend yield |
te |
time to expiration |
s0 |
current asset value |
sigma |
volatility |
skew |
normalized skewness |
kurt |
normalized kurtosis |
Details
This density function attempts to capture deviations from lognormal density by using Edgeworth expansions.
Value
density value at x
Author(s)
Kam Hamidieh
References
E. Jondeau and S. Poon and M. Rockinger (2007): Financial Modeling Under Non-Gaussian Distributions Springer-Verlag, London
R. Jarrow and A. Rudd (1982) Approximate valuation for arbitrary stochastic processes. Journal of Finanical Economics, 10, 347-369
C.J. Corrado and T. Su (1996) S&P 500 index option tests of Jarrow and Rudd's approximate option valuation formula. Journal of Futures Markets, 6, 611-629
Examples
#
# Look at a true lognorma density & related dew
#
r = 0.05
y = 0.03
s0 = 1000
sigma = 0.25
te = 100/365
strikes = seq(from=600, to = 1400, by = 1)
v = sqrt(exp(sigma^2 * te) - 1)
ln.skew = 3 * v + v^3
ln.kurt = 16 * v^2 + 15 * v^4 + 6 * v^6 + v^8
skew.4 = ln.skew * 1.50
kurt.4 = ln.kurt * 1.50
skew.5 = ln.skew * 0.50
kurt.5 = ln.kurt * 2.00
ew.density.4 = dew(x=strikes, r=r, y=y, te=te, s0=s0, sigma=sigma,
skew=skew.4, kurt=kurt.4)
ew.density.5 = dew(x=strikes, r=r, y=y, te=te, s0=s0, sigma=sigma,
skew=skew.5, kurt=kurt.5)
bsm.density = dlnorm(x = strikes, meanlog = log(s0) + (r - y - (sigma^2)/2)*te,
sdlog = sigma*sqrt(te), log = FALSE)
matplot(strikes, cbind(bsm.density, ew.density.4, ew.density.5), type="l",
lty=c(1,1,1), col=c("black","red","blue"),
main="Black = BSM, Red = EW 1.5 Times, Blue = EW 0.50 & 2")