Option Pricing Model Under Volatility Smile-empirically [i.e. Smile-empirical] Test on S & P 500 Options PDF Download

Author: Vincent Hung-Ping Chang
Publisher:
ISBN:
Category :
Languages : en
Pages : 134

View

Book Description

Author: Ren-Raw Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 35

View

Book Description
The volatility smile that is generated by the Black-Scholes model has been traditionally attributed to an inappropriately assumed return distribution. Previous studies use alternative specifications such as stochastic volatility and jump diffusion models. However, these specifications do not eliminate the smile. Moreover, as documented by Das and Sundaram (1999), the return distributions that are generated by stochastic volatility and jump diffusion models do not match important characteristics of realized returns. We construct an alternative valuation procedure to price Samp;P 500 call options, using a histogram from past Samp;P 500 index daily returns. We find that the implied volatilities that are generated by our model do not exhibit substantial relationship to moneyness levels. Consistent with the absence of the smile, payoffs to holding options are also not related to moneyness levels. We also find that these payoffs are more closely related to our implied volatility measures than to the Black Scholes implied volatility measures. These findings indicate that our model is more appropriate than the Black-Scholes model to value Samp;P 500 call options.

Author: Bernard Dumas
Publisher:
ISBN:
Category :
Languages : en
Pages :

View

Book Description
Implied volatility quot;smilesquot; have been documented in a number of option markets worldwide. The volatilities implied by the Black-Scholes (1973) model tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) offer an explanation for this behavior, that is, the volatility of the return of the underlying asset is a deterministic function of the asset price level and time. Their option valuation methodology, dubbed the quot;implied binomial treequot; approach, describes (perfectly) the observed structure of options prices and purportedly provides more accurate hedge ratios. We systematically evaluate the empirical properties of the implied binomial tree approach to option valuation using Samp;P 500 index options during the period June 1988 and December 1993.

Author: Steven A. Weinberg
Publisher:
ISBN:
Category : Foreign exchange futures
Languages : en
Pages : 52

View

Book Description

Author: Shu Feng
Publisher:
ISBN:
Category :
Languages : en
Pages :

View

Book Description
An option contract is a zero-sum game, so two identical risk-averse investors would never take opposite sides of it. While they will agree on the correct option price, they would never trade with each other. Heterogeneity is essential for options trading to exist, and aggregating diverse expectations into a single market clearing price is an important function of any derivatives market. In this article, the authors look at the impact of heterogeneous beliefs about earnings, as reflected in the dispersion of analysts' forecasts in the IBES database. The effect on the market is measured by the slopes of the volatility smile for out-of-the-money (OTM) minus at-the-money (ATM) puts (left side of the smile) and OTM minus ATM calls (right side). Smiles for individual stocks are higher and more smile-shaped than for the SPX index and show significant and interesting effects from the explanatory variables, including firm size, liquidity, market volatility, and book-to-market. But controlling for those effects, dispersion in earnings forecasts raises OTM IVs relative to ATM IVs, both in regressions and in portfolio sorts. Interesting differences appear between systematic and idiosyncratic components of the smile slope, with systematic effects especially important for OTM puts, while OTM calls are more influenced by the idiosyncratic component.

Author: Rritu Saurabha
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

View

Book Description
The most popular model for pricing options, both in financial literature as well as in practice has been the Black-Scholes model. In spite of its wide spread use the model appears to be deficient in pricing deep in the money and deep out of the money options using statistical estimates of volatility. This limitation has been taken into account by practitioners using the concept of implied volatility. The value of implied volatility for different strike prices should theoretically be identical, but is usually seen in the market to vary. In most markets across the world it has been observed that the implied volatilities of different strike prices form a pattern of either a 'smile' or 'skew'. Theoretically, since volatility is a property of the underlying asset it should be predicted by the pricing formula to be identical for all derivatives based on that same asset. Hull [1993] and Nattenburg [1994] have attributed the volatility smile to the non normal Skewness and Kurtosis of stock returns. Many improvements to the Black-Scholes formula have been suggested in academic literature for addressing the issue of volatility smile. This paper studies the effect of using a variation of the BS model (suggested by Corrado & Sue [1996] incorporating non-normal skewness and kurtosis) to price call options on S&P CNX Nifty. The results strongly suggest that the incorporation of skewness and kurtosis into the option pricing formula yields values much closer to market prices. Based on this result and the fact that this approach does not add any further complexities to the option pricing formula, we suggest that this modified approach should be considered as a better alternative.

Author: Jens Carsten Jackwerth
Publisher:
ISBN:
Category :
Languages : en
Pages :

View

Book Description

Author: Matthias R. Fengler
Publisher: Springer Science & Business Media
ISBN: 3540305912
Category : Business & Economics
Languages : en
Pages : 232

View

Book Description
This book offers recent advances in the theory of implied volatility and refined semiparametric estimation strategies and dimension reduction methods for functional surfaces. The first part is devoted to smile-consistent pricing approaches. The second part covers estimation techniques that are natural candidates to meet the challenges in implied volatility surfaces. Empirical investigations, simulations, and pictures illustrate the concepts.

Author: Bernard Dumas
Publisher:
ISBN:
Category : Options (Finance)
Languages : en
Pages : 34

View

Book Description
Abstract: Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S & P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities.

Author: John Lee
Publisher: Springer Nature
ISBN: 3031142837
Category : Business & Economics
Languages : en
Pages : 521

View

Book Description
This advanced textbook for business statistics teaches, statistical analyses and research methods utilizing business case studies and financial data with the applications of Excel VBA, Python and R. Each chapter engages the reader with sample data drawn from individual stocks, stock indices, options, and futures. Now in its second edition, it has been expanded into two volumes, each of which is devoted to specific parts of the business analytics curriculum. To reflect the current age of data science and machine learning, the used applications have been updated from Minitab and SAS to Python and R, so that readers will be better prepared for the current industry. This second volume is designed for advanced courses in financial derivatives, risk management, and machine learning and financial management. In this volume we extensively use Excel, Python, and R to analyze the above-mentioned topics. It is also a comprehensive reference for active statistical finance scholars and business analysts who are looking to upgrade their toolkits. Readers can look to the first volume for dedicated content on financial statistics, and portfolio analysis.