Bid-ask bounds for option prices: the two-tail distortion model
Year: 2025
Type: article
Abstract: We model the bid-ask spreads of call and put options by a two-tail distortion (2TD) of a reference probability distribution. The model applies the Choquet pricing approach with no-arbitrage restrictions, requiring a duality relationship between the capacities pricing long and short positions of call and put options. Moreover, the put-call parity relationship requires that the sum of bid-ask spreads of call and put options with the same strike be invariant across the strikes. We calibrate the 2TD model with a simple Sugeno distortion on a sample of two months daily data for three stock indexes and three different reference models and show that the 2TD generally provides a better fit to the data than the standard distortion of one tail only. Moreover, the estimate of the distortion parameter happens to be very similar across the different models.
Source: Quantitative Finance
Authors: Umberto Cherubini, Sabrina Mulinacci
Institution: University of Bologna
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4408898615