Author(s)

Yingying Cao, Xueping Liu, Yiqian Zhao^*, Xuege Han

School of Mathematics and Information Science, Henan Polytechnic University, Jiaozuo, China.

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.

Option Pricing, Logarithmic Truncated t-Distribution, Asset Returns, Risk-Neutral Valuation Approach

Cao, Y. , Liu, X. , Zhao, Y. and Han, X. (2023) Pricing European Options Based on a Logarithmic Truncated t-Distribution. Journal of Applied Mathematics and Physics, 11, 1349-1358. doi: 10.4236/jamp.2023.115087.