Siddiqi, Hammad (2013): Analogy Making, Option Prices, and Implied Volatility.

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Abstract
We put forward a new option pricing formula based on the notion that people tend to think by analogies and comparisons. The new formula differs from the Black Scholes formula due to the appearance of a parameter in the formula that captures the risk premium on the underlying. The new formula, called the analogy option pricing formula, provides an explanation for the implied volatility skew puzzle in equity options. We also discuss the key empirical predictions of the analogy formula.
Item Type:  MPRA Paper 

Original Title:  Analogy Making, Option Prices, and Implied Volatility 
Language:  English 
Keywords:  Analogy Making, Implied Volatility, Implied Volatility Skew, Option Prices, Risk Premium 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing G  Financial Economics > G1  General Financial Markets > G15  International Financial Markets 
Item ID:  48862 
Depositing User:  Hammad Siddiqi 
Date Deposited:  06 Aug 2013 17:04 
Last Modified:  27 Sep 2019 14:52 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/48862 