IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v49y2017i40p4026-4034.html
   My bibliography  Save this article

A new factor to explain implied volatility smirk

Author

Listed:
  • José Fajardo

Abstract

In this article, we find empirical evidence of a new smirk factor, obtained from the jump structure of the risk neutral distribution of the underlying Lévy process. As an application we show how to price a barrier style contract.

Suggested Citation

  • José Fajardo, 2017. "A new factor to explain implied volatility smirk," Applied Economics, Taylor & Francis Journals, vol. 49(40), pages 4026-4034, August.
  • Handle: RePEc:taf:applec:v:49:y:2017:i:40:p:4026-4034
    DOI: 10.1080/00036846.2016.1273505
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00036846.2016.1273505
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/00036846.2016.1273505?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fajardo, José & Farias, Aquiles, 2004. "Generalized Hyperbolic Distributions and Brazilian Data," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 24(2), November.
    2. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-777, April.
    3. Jos� Fajardo & Ernesto Mordecki, 2014. "Skewness premium with L�vy processes," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1619-1626, September.
    4. JosE Fajardo & Ernesto Mordecki, 2006. "Symmetry and duality in Levy markets," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 219-227.
    5. Bruno Feunou & Jean-Sébastien Fontaine & Roméo Tédongap, 2017. "Implied volatility and skewness surface," Review of Derivatives Research, Springer, vol. 20(2), pages 167-202, July.
    6. Fajardo, José, 2015. "Barrier style contracts under Lévy processes: An alternative approach," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 179-187.
    7. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-778, April.
    8. Corcuera, José Manuel & De Spiegeleer, Jan & Fajardo, José & Jönsson, Henrik & Schoutens, Wim & Valdivia, Arturo, 2014. "Close form pricing formulas for Coupon Cancellable CoCos," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 339-351.
    9. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    10. 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 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jianhui Li & Sebastian A. Gehricke & Jin E. Zhang, 2019. "How do US options traders “smirk” on China? Evidence from FXI options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1450-1470, November.
    2. Fajardo, José, 2016. "Power Style Contracts Under Asymmetric Lévy Processes," MPRA Paper 71813, University Library of Munich, Germany.
    3. José Fajardo, 2018. "Barrier style contracts under Lévy processes once again," Annals of Finance, Springer, vol. 14(1), pages 93-103, February.
    4. Fajardo, José, 2015. "Barrier style contracts under Lévy processes: An alternative approach," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 179-187.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. José Fajardo, 2018. "Barrier style contracts under Lévy processes once again," Annals of Finance, Springer, vol. 14(1), pages 93-103, February.
    2. Federico De Olivera & José Fajardo & Ernesto Mordecki, 2018. "Skewed Lévy Models And Implied Volatility Skew," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-16, March.
    3. Jianhui Li & Sebastian A. Gehricke & Jin E. Zhang, 2019. "How do US options traders “smirk” on China? Evidence from FXI options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1450-1470, November.
    4. Jean-Philippe Aguilar & Jan Korbel, 2019. "Simple Formulas for Pricing and Hedging European Options in the Finite Moment Log-Stable Model," Risks, MDPI, Open Access Journal, vol. 7(2), pages 1-14, April.
    5. Xiaolan Jia & Xinfeng Ruan & Jin E. Zhang, 2021. "The implied volatility smirk of commodity options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 72-104, January.
    6. Pakorn Aschakulporn & Jin E. Zhang, 2021. "New Zealand whole milk powder options," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2201-2246, April.
    7. Sanjay K. Nawalkha & Xiaoyang Zhuo, 2020. "A Theory of Equivalent Expectation Measures for Contingent Claim Returns," Papers 2006.15312, arXiv.org, revised Jul 2021.
    8. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    9. Lv, Longjin & Xiao, Jianbin & Fan, Liangzhong & Ren, Fuyao, 2016. "Correlated continuous time random walk and option pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 447(C), pages 100-107.
    10. Feng, Chengxiao & Tan, Jie & Jiang, Zhenyu & Chen, Shuang, 2020. "A generalized European option pricing model with risk management," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 545(C).
    11. Fajardo, José, 2016. "Power Style Contracts Under Asymmetric Lévy Processes," MPRA Paper 71813, University Library of Munich, Germany.
    12. Jingzhi Huang & Liuren Wu, 2004. "Specification Analysis of Option Pricing Models Based on Time- Changed Levy Processes," Finance 0401002, University Library of Munich, Germany.
    13. Young Shin Kim & Kum-Hwan Roh & Raphaël Douady, 2020. "Tempered Stable Processes with Time Varying Exponential Tails," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-03018495, HAL.
    14. Minqiang Li & Kyuseok Lee, 2011. "An adaptive successive over-relaxation method for computing the Black-Scholes implied volatility," Quantitative Finance, Taylor & Francis Journals, vol. 11(8), pages 1245-1269.
    15. Alvaro Cartea, 2005. "Dynamic Hedging of Financial Instruments When the Underlying Follows a Non-Gaussian Process," Birkbeck Working Papers in Economics and Finance 0508, Birkbeck, Department of Economics, Mathematics & Statistics.
    16. Carr, Peter & Wu, Liuren, 2007. "Stochastic skew in currency options," Journal of Financial Economics, Elsevier, vol. 86(1), pages 213-247, October.
    17. Jean-Philippe Aguilar, 2021. "The value of power-related options under spectrally negative Lévy processes," Review of Derivatives Research, Springer, vol. 24(2), pages 173-196, July.
    18. José Fajardo & Ernesto Mordecki, 2006. "Skewness Premium with Lévy Processes," IBMEC RJ Economics Discussion Papers 2006-04, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    19. Xu Guo & Yutian Li, 2016. "Valuation of American options under the CGMY model," Quantitative Finance, Taylor & Francis Journals, vol. 16(10), pages 1529-1539, October.
    20. Grzegorz Krzy.zanowski & Marcin Magdziarz & {L}ukasz P{l}ociniczak, 2019. "A weighted finite difference method for subdiffusive Black Scholes Model," Papers 1907.00297, arXiv.org, revised Apr 2020.

    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:49:y:2017:i:40:p:4026-4034. 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: . General contact details of provider: http://www.tandfonline.com/RAEC20 .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.