2009/01/05 by William T. Shaw, Shaw, William T., Ian R. C. Buckley +1 · 1 citation
Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #Statistical Finance (q-fin.ST) #q-fin.CP #q-fin.ST
paper · pdf · doi:10.48550/arxiv.0901.0434
Presentation at 2007 IMA First Conference on Computational Finance
arxiv created 2009/01/05 · arxiv updated 2009/12/01
Motivated by the need for parametric families of rich and yet tractable distributions in financial mathematics, both in pricing and risk management settings, but also considering wider statistical applications, we investigate a novel technique for introducing skewness or kurtosis into a symmetric or other distribution. We use a "transmutation" map, which is the functional composition of the cumulative distribution function of one distribution with the inverse cumulative distribution (quantile) function of another. In contrast to the Gram-Charlier approach, this is done without resorting to an asymptotic expansion, and so avoids the pathologies that are often associated with it. Examples of parametric distributions that we can generate in this way include the skew-uniform, skew-exponential, skew-normal, and skew-kurtotic-normal.