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A new factor to explain implied volatility smirk

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  • José Fajardo

Abstract

In this article, we find empirical evidence of a new smirk factor, obtained from the jump structure of the risk neutral distribution of the underlying Lévy process. As an application we show how to price a barrier style contract.

Suggested Citation

  • José Fajardo, 2017. "A new factor to explain implied volatility smirk," Applied Economics, Taylor & Francis Journals, vol. 49(40), pages 4026-4034, August.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:40:p:4026-4034
    DOI: 10.1080/00036846.2016.1273505
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    References listed on IDEAS

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    1. Fajardo, José & Farias, Aquiles, 2004. "Generalized Hyperbolic Distributions and Brazilian Data," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 24(2), November.
    2. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-777, April.
    3. Jos� Fajardo & Ernesto Mordecki, 2014. "Skewness premium with L�vy processes," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1619-1626, September.
    4. JosE Fajardo & Ernesto Mordecki, 2006. "Symmetry and duality in Levy markets," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 219-227.
    5. Bruno Feunou & Jean-Sébastien Fontaine & Roméo Tédongap, 2017. "Implied volatility and skewness surface," Review of Derivatives Research, Springer, vol. 20(2), pages 167-202, July.
    6. Fajardo, José, 2015. "Barrier style contracts under Lévy processes: An alternative approach," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 179-187.
    7. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-778, April.
    8. Corcuera, José Manuel & De Spiegeleer, Jan & Fajardo, José & Jönsson, Henrik & Schoutens, Wim & Valdivia, Arturo, 2014. "Close form pricing formulas for Coupon Cancellable CoCos," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 339-351.
    9. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    10. 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 637-654, May-June.
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    Cited by:

    1. José Fajardo, 2018. "Barrier style contracts under Lévy processes once again," Annals of Finance, Springer, vol. 14(1), pages 93-103, February.
    2. Connor J.A. Stuart & Sebastian A. Gehricke & Jin E. Zhang & Xinfeng Ruan, 2021. "Implied volatility smirk in the Australian dollar market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4573-4599, September.
    3. Fajardo, José, 2015. "Barrier style contracts under Lévy processes: An alternative approach," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 179-187.
    4. Jianhui Li & Sebastian A. Gehricke & Jin E. Zhang, 2019. "How do US options traders “smirk” on China? Evidence from FXI options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1450-1470, November.
    5. Fajardo, José, 2016. "Power Style Contracts Under Asymmetric Lévy Processes," MPRA Paper 71813, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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