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Arbitrage hedging strategy and one more explanation of the volatility smile

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  • Mikhail Martynov
  • Olga Rozanova

Abstract

We present an explicit hedging strategy, which enables to prove arbitrageness of market incorporating at least two assets depending on the same random factor. The implied Black-Scholes volatility, computed taking into account the form of the graph of the option price, related to our strategy, demonstrates the "skewness" inherent to the observational data.

Suggested Citation

  • Mikhail Martynov & Olga Rozanova, 2011. "Arbitrage hedging strategy and one more explanation of the volatility smile," Papers 1102.5525, arXiv.org.
    • Handle: RePEc:arx:papers:1102.5525
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    File URL: http://arxiv.org/pdf/1102.5525
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