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.

Cherubini, U., Mulinacci, S. (2025). Bid-ask bounds for option prices: the two-tail distortion model. QUANTITATIVE FINANCE, 25(4), 527-542 [10.1080/14697688.2025.2475087].

Bid-ask bounds for option prices: the two-tail distortion model

Cherubini, Umberto;Mulinacci, Sabrina
2025

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.
2025
Cherubini, U., Mulinacci, S. (2025). Bid-ask bounds for option prices: the two-tail distortion model. QUANTITATIVE FINANCE, 25(4), 527-542 [10.1080/14697688.2025.2475087].
Cherubini, Umberto; Mulinacci, Sabrina
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/1011286
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