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Option data and modeling BSM implied volatility

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  • Matthias Fengler

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Abstract

This contribution to the Handbook of Computational Finance, Springer-Verlag, gives an overview on modeling implied volatility data. After introducing the concept of Black-Scholes-Merton implied volatility (IV), the empirical stylized facts of IV data are reviewed. We then discuss recent results on IV surface dynamics and the computational aspects of IV. The main focus is on various parametric, semi- and nonparametric modeling strategies for IV data, including ones which respect no-arbitrage bounds.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2010/DP-1032-Fe.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2010 with number 2010-32.

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Length: 30 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-32

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Keywords: Implied volatility;

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  1. Corrado, Charles J. & Miller, Thomas Jr., 1996. "A note on a simple, accurate formula to compute implied standard deviations," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 595-603, April.
  2. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
  3. Mark Britten-Jones & Anthony Neuberger, 2000. "Option Prices, Implied Price Processes, and Stochastic Volatility," Journal of Finance, American Finance Association, vol. 55(2), pages 839-866, 04.
  4. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
  5. M. Benko & M. Fengler & W. Härdle & M. Kopa, 2007. "On extracting information implied in options," Computational Statistics, Springer, vol. 22(4), pages 543-553, December.
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  7. Steven P. Feinstein, 1988. "A source of unbiased implied volatility forecasts," Working Paper 88-9, Federal Reserve Bank of Atlanta.
  8. Peter Carr & Liuren Wu, 2002. "The Finite Moment Log Stable Process and Option Pricing," Finance 0207012, EconWPA.
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Cited by:
  1. Cristian Homescu, 2011. "Implied Volatility Surface: Construction Methodologies and Characteristics," Papers 1107.1834, arXiv.org.

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