Approximating equity volatility
AbstractThe volatility estimation is a crucial problem for pricing derivatives. The traditional implied volatility approach induces the undesired smile effect and is therefore inconsistent with the market reality. A second more realistic approach is due to Bensoussan, Crouhy and Galai (1995) who derive an extension of the Black-Scholes model where the stochastic volatility ?is endogenous and depends on the change in the firm’s financial leverage. These authors give an analytic approximation for ?when the firm is financed by external funds such as debts, under the assumptions that the risk-free rate and the volatility of the return on the firm’s asset are constant. In this work, we will generalize this result by allowing these parameters to be variable.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 04-028.RS.
Length: 18 p.
Date of creation: 2004
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More information through EDIRC
Black-Scholes model; derivative pricing; volatility.;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-05 (All new papers)
- NEP-FIN-2006-02-05 (Finance)
- NEP-FMK-2006-02-05 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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