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Option pricing with a dynamic fat-tailed model

Author

Listed:
  • Sofiane Aboura

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Sébastien Valeyre
  • Niklas Wagner

    (Passau University - Passau University)

Abstract

In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing of European-style options with various attractive features such as a mixture of heavy-tails and Gaussian distribution along with a leverage effect property. We test the model on FTSE 100 stock index options during the period of January 2008 to June 2009. Our empirical results show that the model adequately fits the volatility smile dynamics particularly during stress periods. Furthermore, we find that the leverage effect form is driven by the sticky-strike rule.

Suggested Citation

  • Sofiane Aboura & Sébastien Valeyre & Niklas Wagner, 2014. "Option pricing with a dynamic fat-tailed model," Post-Print hal-01531191, HAL.
    • Handle: RePEc:hal:journl:hal-01531191
    DOI: 10.1057/jdhf.2014.16
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    Cited by:

    1. Broeders, Dirk & de Haan, Leo & Willem van den End, Jan, 2023. "How quantitative easing changes the nature of sovereign risk," Journal of International Money and Finance, Elsevier, vol. 137(C).
    2. Hang Lin & Lixin Liu & Zhengjun Zhang, 2023. "Tail Risk Signal Detection through a Novel EGB2 Option Pricing Model," Mathematics, MDPI, vol. 11(14), pages 1-32, July.

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