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Ad Hoc Black and Scholes Procedures with the Time-to-Maturity

Author

Listed:
  • Suk Joon Byun

    (College of Business, Korea Advanced Institute of Science and Technology (KAIST), 85 Hoegi-ro, Dongdaemun-gu, Seoul, 02455, Korea)

  • Sol Kim

    (College of Business, Hankuk University of Foreign Studies, 107, Imun-ro, Dongdaemun-gu, Seoul, 02450, Korea)

  • Dong Woo Rhee

    (Credit Guarantee and Investment Facility (CGIF), Asian Development Bank Building, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Phlippines)

Abstract

There are two ad hoc approaches to Black and Scholes model. The “relative smile” approach treats the implied volatility skew as a fixed function of moneyness, whereas the “absolute smile” approach treats it as a function of the strike price. Previous studies reveal that the “absolute smile” approach is superior to the “relative smile” approach as well as to other sophisticated models for pricing options. We find that the time-to-maturity factors improve the pricing and hedging performance of the ad hoc procedures and the superiority of the “absolute smile” approach still holds even after the time-to-maturity is considered.

Suggested Citation

  • Suk Joon Byun & Sol Kim & Dong Woo Rhee, 2018. "Ad Hoc Black and Scholes Procedures with the Time-to-Maturity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-21, March.
    • Handle: RePEc:wsi:rpbfmp:v:21:y:2018:i:01:n:s0219091518500066
    DOI: 10.1142/S0219091518500066
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    Cited by:

    1. Oleg Sokolinskiy, 2020. "Conditional dependence in post-crisis markets: dispersion and correlation skew trades," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 389-426, August.

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