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Normal mixture diffusion with uncertain volatility: Modelling short- and long-term smile effects

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  • Alexander, Carol

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 28 (2004)
Issue (Month): 12 (December)
Pages: 2957-2980

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Handle: RePEc:eee:jbfina:v:28:y:2004:i:12:p:2957-2980

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References

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  1. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
  2. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
  3. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  5. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
  6. N. H. Bingham & Rudiger Kiesel, 2002. "Semi-parametric modelling in finance: theoretical foundations," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 241-250.
  7. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  9. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  10. McFarland, James W & Pettit, R Richardson & Sung, Sam K, 1982. " The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement," Journal of Finance, American Finance Association, vol. 37(3), pages 693-715, June.
  11. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  12. Ritchey, Robert J, 1990. "Call Option Valuation for Discrete Normal Mixtures," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 13(4), pages 285-96, Winter.
  13. Klaassen, F.J.G.M., 1998. "Improving Garch Volatility Forecasts," Discussion Paper 1998-52, Tilburg University, Center for Economic Research.
  14. Ball, Clifford A. & Torous, Walter N., 1983. "A Simplified Jump Process for Common Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(01), pages 53-65, March.
  15. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
  16. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
  17. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
  18. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, vol. 44(2), pages 305-21, March.
  19. Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 91-115, March.
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Cited by:
  1. Donald Aingworth & Sanjiv Das & Rajeev Motwani, 2006. "A simple approach for pricing equity options with Markov switching state variables," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 95-105.
  2. Carol Alexander & Andrew Scourse, 2004. "Bivariate normal mixture spread option valuation," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 637-648.
  3. Emese Lazar & Carol Alexander, 2006. "Normal mixture GARCH(1,1): applications to exchange rate modelling," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(3), pages 307-336.
  4. Dinghai Xu, 2009. "The Applications of Mixtures of Normal Distributions in Empirical Finance: A Selected Survey," Working Papers 0904, University of Waterloo, Department of Economics, revised Sep 2009.
  5. Carol Alexander & Leonardo M. Nogueira, 2004. "Hedging with Stochastic and Local Volatility," ICMA Centre Discussion Papers in Finance icma-dp2004-10, Henley Business School, Reading University, revised Dec 2004.
  6. En-Der Su & Feng-Jeng Lin, 2012. "Two-State Volatility Transition Pricing and Hedging of TXO Options," Computational Economics, Society for Computational Economics, vol. 39(3), pages 259-287, March.

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