Option Pricing with the Logistic Return Distribution

Haim Levy*, Moshe Levy

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

The Black–Scholes model and many of its extensions imply a log-normal distribution of stock total returns over any finite holding period. However, for a holding period of up to one year, empirical stock return distributions (both conditional and unconditional) are not log-normal, but rather much closer to the logistic distribution. This paper derives analytic option pricing formulas for an underlying asset with a logistic return distribution. These formulas are simple and elegant and employ exactly the same parameters as B&S. The logistic option pricing formula fits empirical option prices much better than B&S, providing explanatory power comparable to much more complex models with a larger number of parameters.

Original languageAmerican English
Article number67
JournalJournal of Risk and Financial Management
Volume17
Issue number2
DOIs
StatePublished - Feb 2024

Bibliographical note

Publisher Copyright:
© 2024 by the authors.

Keywords

  • distribution of returns
  • holding period
  • logistic distribution
  • option pricing

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