IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Why is the Index Smile So Steep?

  • Nicole Branger

    ()

  • Christian Schlag

    ()

Registered author(s):

    Empirical evidence shows that the implied volatility smiles for index options are significantly steeper than those for individual options. We propose a model setup where we start from the joint dynamics of the stocks and where the index value is a weighted sum of individual stock prices. Then the differences between the index smile and the smiles for individual stocks are entirely determined by the dependence structure among the stocks. We illustrate our idea in a jump-diffusion framework where both the diffusion and the jumps are decomposed into common and idiosyncratic components. Empirical data for options on the German stock index DAX and on Deutsche Bank are used to show that the model can explain the stylized facts on implied volatility smiles.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://journals.kluweronline.com/issn/1572-3097/contents
    Download Restriction: no

    Article provided by Springer in its journal Review of Finance.

    Volume (Year): 8 (2004)
    Issue (Month): 1 ()
    Pages: 109-127

    as
    in new window

    Handle: RePEc:kap:eurfin:v:8:y:2004:i:1:p:109-127
    Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=111870

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:kap:eurfin:v:8:y:2004:i:1:p:109-127. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.