Option Pricing by Probability Distortion Operator Based on the Quantile Function

Abstract EN

A new class of distortion operators based on quantile function is proposed for pricing options.

It is shown that option prices obtained with our distortion operators are just the prices under mean correcting martingale measure in exponential Lévy models.

In particular, Black-Scholes formula can be recuperated by our distortion operator.

Simulation analysis shows that our distortion operator is superior to normal distortion operator and NIG distortion operator.