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Traders’ heterogeneous beliefs about stock volatility and the implied volatility skew in financial options markets

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  • Nappo, Giovanna
  • Marchetti, Fabio Massimo
  • Vagnani, Gianluca

Abstract

The paper represents an initial effort to unfold some of the determinants of the implied volatility skew empirically observed in financial (derivative) markets. In particular, in a general stochastic volatility model, we theoretically relate traders’ heterogenous expectations about the underlying stock volatility to the emergence of the implied volatility skew. We also used our model to predict sampled option prices. The analysis provides new characterizations of the behavior of the equilibrium option price as a mixture of Black and Scholes prices, and the associated Black and Scholes implied volatility that hold promise for practical modeling and forecasting.

Suggested Citation

  • Nappo, Giovanna & Marchetti, Fabio Massimo & Vagnani, Gianluca, 2023. "Traders’ heterogeneous beliefs about stock volatility and the implied volatility skew in financial options markets," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612323000387
    DOI: 10.1016/j.frl.2023.103664
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    Cited by:

    1. Zhao, Mengyang & Zhang, Lingxiao, 2023. "Foreign ownership, heterogeneous beliefs, and stock market volatility," Finance Research Letters, Elsevier, vol. 55(PA).

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