Implied volatility skews and stock return skewness and kurtosis implied by stock option prices
The Black-Scholes* option pricing model is commonly applied to value a wide range of option contracts. However, the model often inconsistently prices deep in-the-money and deep out-of-the-money options. Options professionals refer to this well-known phenomenon as a volatility 'skew' or 'smile'. In this paper, we examine an extension of the Black-Scholes model developed by Corrado and Su that suggests skewness and kurtosis in the option-implied distributions of stock returns as the source of volatility skews. Adapting their methodology, we estimate option-implied coefficients of skewness and kurtosis for four actively traded stock options. We find significantly nonnormal skewness and kurtosis in the option-implied distributions of stock returns.
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Volume (Year): 3 (1997)
Issue (Month): 1 ()
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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.:
- Corrado, Charles J & Su, Tie, 1996.
"Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, Summer.
- Charles J. Corrado & Tie Su, 1996. "Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, 06.
- 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.
- Barone-Adesi, Giovanni & Whaley, Robert E., 1986. "The valuation of American call options and the expected ex-dividend stock price decline," Journal of Financial Economics, Elsevier, vol. 17(1), pages 91-111, September. Full references (including those not matched with items on IDEAS)