The Price of a Smile: Hedging and Spanning in Option Markets
AbstractThe volatility smile changed drastically around the crash of 1987, and new option pricing models have been proposed to accommodate that change. Deterministic volatility models allow for more flexible volatility surfaces but refrain from introducing additional risk factors. Thus, options are still redundant securities. Alternatively, stochastic models introduce additional risk factors, and options are then needed for spanning of the pricing kernel. We develop a statistical test based on this difference in spanning. Using daily S&P 500 index options data from 1986-95, our tests suggest that both in- and out-of-the-money options are needed for spanning. The findings are inconsistent with deterministic volatility models but are consistent with stochastic models that incorporate additional priced risk factors, such as stochastic volatility, interest rates, or jumps. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by Society for Financial Studies in its journal Review of Financial Studies.
Volume (Year): 14 (2001)
Issue (Month): 2 ()
Contact details of provider:
Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.