Parity analysis of non-log normality of Black-Scholes and its inter-competence

Enforced by the empirical deficiencies of the Black-Scholes and its wrong distributional assumption, researchers provoked to pursue the development of more realistic option pricing models encompassing the level of skewness and kurtosis. Therefore, the objective of this paper is multi-fold. The first and foremost objective is to investigate the Black-Scholes assumption of log-normality of the underlying asset return density with constant volatility. The second relative objective is to test the comparative competitiveness of impeccable models capable of incorporating log non-normality explaining smile phenomenon of option pricing. Though the option pricing models is a combination of numerous models, to provide a focused approach we banked upon the three most dominant models of this specie: Jarrow-Rudd, Corrado-Su, and Gram-Charlier. To test the price effectiveness of models we inter-passed these across meticulously collected data of the most unsteady period of Indian financial frame. Besides that, the paper also investigates the information content of three crucial parameters namely volatility smile, skewness and kurtosis.