Skewness and kurtosis in s&p 500 index returns implied by option prices

Charles J. Corrado, Tie Su

Research output: Contribution to journalArticlepeer-review

143 Scopus citations


The Black-Scholes (1973) model frequently misprices deep-in-the-money and deep-out-of-the-money options. Practitioners popularly refer to these strike price biases as volatility smiles. In this paper we examine a method to extend the Black-Scholes model to account for biases induced by nonnormal skewness and kurtosis in stock return distributions. The method adapts a Gram-Charlier series expansion of the normal density function to provide skewness and kurtosis adjustment terms for the Black-Scholes formula. Using this method, we estimate option-implied coefficients of skewness and kurtosis in S&P 500 stock index returns. We find significant nonnormal skewness and kurtosis implied by option prices.

Original languageEnglish (US)
Pages (from-to)175-192
Number of pages18
JournalJournal of Financial Research
Issue number2
StatePublished - Jun 1996

ASJC Scopus subject areas

  • Accounting
  • Finance


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