Why do we smile? On the determinants of the implied volatility function
AbstractWe report simple regressions and Granger causality tests in order to understand the pattern of implied volatilities across exercise prices. We employ all calls and puts transacted between 16:00 and 16:45 on the Spanish IBEX-35 index from January 1994 to April 1996. Transaction costs, proxied by the bid–ask spread, seem to be a key determinant of the curvature of the volatility smile. Moreover, time to expiration, the uncertainty associated with the market and the relative market momentum are also important variables in explaining the smile.
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/7085.
Length: 1181 p.
Date of creation: Aug 1999
Date of revision:
Publication status: Published in Journal of Banking & Finance (1999-08) v. 23, p.1151-1179.
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Web page: http://www.uc3m.es
Smiles; Bid–ask spread; Volatility; Causality;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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