Carey, Alexander (2005): Higher-order volatility.
Preview |
PDF
MPRA_paper_4993.pdf Download (173kB) | Preview |
Abstract
An important purpose of derivatives modelling is to provide practitioners with actionable measures of risk. The Black and Scholes volatility remains a favourite on trading floors in spite of well-known biases. One popular extension is to make volatility a function of time and the underlying asset price, as in local volatility models. This paper presents an alternative extension, which produces volatility-like quantities to address the skews and smiles found in most derivatives markets.
Item Type: | MPRA Paper |
---|---|
Original Title: | Higher-order volatility |
Language: | English |
Keywords: | higher-order volatility; higher-order moments; volatility smile; S&P 500 |
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 |
Item ID: | 4993 |
Depositing User: | Alexander Carey |
Date Deposited: | 22 Sep 2007 |
Last Modified: | 28 Sep 2019 03:50 |
References: | Bates, D. (1991) The crash of ’87: Was it expected? The evidence from options markets, Journal of Finance 46(3), 1009-1044. Black, F. and M. Scholes (1973) The pricing of options and corporate liabilities, Journal of Political Economy 81(3), 637-654. Derman, E. and I. Kani (1994) Riding on a smile, Risk 7(2), 32-39. Dupire, B. (1994) Pricing with a smile, Risk 7(1), 18-20. Jarrow, R. and A. Rudd (1982) Approximate option valuation for arbitrary stochastic processes, Journal of Financial Economics 10(3), 347-369. Merton, R. (1973) Theory of rational option pricing, Bell Journal of Economics and Management Science 4(1), 141-183. Merton, R. (1976) Option pricing when underlying stock returns are discontinuous, Journal of Financial Economics 3(1-2), 125-144. Rubinstein, M. (1994) Implied binomial trees, Journal of Finance 49(3), 771-818. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/4993 |