IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Mandelbrot and the Smile

  • Thorsten Lehnert

    (Assistant Professor of Finance, Universiteit Maastricht, Limburg Institute of Financial Economics, P.O.Box 616, NL-6200 MD Maastricht/Niederlande)

Registered author(s):

    It is a well-documented empirical fact that index option prices systematically differ from Black-Scholes prices. However, previous research provides inconclusive results whether the observed volatility smile could be explained by a discretetime dynamic model of stock returns with skewed, leptokurtic innovations. The improvements in pricing errors are particularly pronounced for out-of-the money put options, while the models partly underperform a Gaussian alternative for near-the-money options. Motivated by theses empirical evidence, I develop a new GARCH option-pricing model with a more flexible innovation structure. In an application of the model to DAX index options, I test the relative performance of the approach against a standard nested GARCH specification and the well-known practitioners Black-Scholes model. I show that the performance of the truncated Lévy GARCH option pricing model is superior to existing approaches.

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Article provided by Credit and Capital Markets in its journal Kredit und Kapital.

    Volume (Year): 42 (2009)
    Issue (Month): 1 ()
    Pages: 125–144

    in new window

    Handle: RePEc:kuk:journl:v:42:y:2009:i:1:p:125-144
    Contact details of provider: Web page:

    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:kuk:journl:v:42:y:2009:i:1:p:125-144. 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: (Credit and Capital Markets)

    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.