TITLE:
Pricing European Options Based on a Logarithmic Truncated t-Distribution
AUTHORS:
Yingying Cao, Xueping Liu, Yiqian Zhao, Xuege Han
KEYWORDS:
Option Pricing, Logarithmic Truncated t-Distribution, Asset Returns, Risk-Neutral Valuation Approach
JOURNAL NAME:
Journal of Applied Mathematics and Physics,
Vol.11 No.5,
May
25,
2023
ABSTRACT: The t-distribution has a “fat tail” feature, which is more suitable than the normal probability density function to describe the distribution characteristics of return on assets. The difficulty of using t-distribution to price European options is that a fat tail can lead to a deviation in one integral required for option pricing. We use a distribution called logarithmic truncated t-distribution to price European options. A risk neutral valuation method was used to obtain a European option pricing model with logarithmic truncated t-distribution.