A general equilibrium and preference free model for pricing options under transformed gamma distribution

Vitiello, Luiz and Poon, Ser-Huang (2008) A general equilibrium and preference free model for pricing options under transformed gamma distribution. Centre for International Capital Markets discussion papers, 2008 (13). pp. 1-29. ISSN 1749-3412

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Abstract

The gamma class of distributions encompasses several important distributions either as special or limiting cases, or through simple transformations. Here we derived closed form and preference free European option pricing formulae for a variety of (transformed) gamma distributions under the general equilibrium RNVR framework. The gamma class of distributions is used historically in hydrology for modelling natural events. Our models can be used to price derivatives associated with these natural phenomena, which will help to encourage greater risk sharing through financial securitization. Our pricing formulae are theoretically sound even if the underlings and the derivative instruments are not (frequently) traded.

Item Type: Article
Uncontrolled Keywords: Centre for International Capital Markets discussion papers; CICM discussion papers; risk neutral valuation relationship; general equilibrium framework; transformed gamma distribution; weather derivatives
Subjects: 300 Social sciences > 330 Economics
Department: Guildhall School of Business and Law
Depositing User: Mary Burslem
Date Deposited: 22 Apr 2015 13:49
Last Modified: 22 Apr 2015 13:49
URI: http://repository.londonmet.ac.uk/id/eprint/476

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