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Analogy Making and the Structure of Implied Volatility Skew

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  • Siddiqi, Hammad

Abstract

An analogy based option pricing model is put forward. If option prices are determined in accordance with the analogy model, and the Black Scholes model is used to back-out implied volatility, then the implied volatility skew arises, which flattens as time to expiry increases. The analogy based stochastic volatility and the analogy based jump diffusion models are also put forward. The analogy based stochastic volatility model generates the skew even when there is no correlation between the stock price and volatility processes, whereas, the analogy based jump diffusion model does not require asymmetric jumps for generating the skew.

Suggested Citation

  • Siddiqi, Hammad, 2014. "Analogy Making and the Structure of Implied Volatility Skew," Risk and Sustainable Management Group Working Papers 187407, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:187407
    DOI: 10.22004/ag.econ.187407
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    Cited by:

    1. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call Writing," Risk and Sustainable Management Group Working Papers 199882, University of Queensland, School of Economics.
    2. O'Callaghan, Patrick, 2015. "Minimal conditions for parametric continuity of a utility representation," Risk and Sustainable Management Group Working Papers 200371, University of Queensland, School of Economics.
    3. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call writing," MPRA Paper 62763, University Library of Munich, Germany.

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