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Volatility Smiles

In: Derivative Security Pricing

Author

Listed:
  • Carl Chiarella

    (University of Technology Sydney)

  • Xue-Zhong He

    (University of Technology Sydney)

  • Christina Sklibosios Nikitopoulos

    (University of Technology Sydney)

Abstract

It is commonly observed across many underlying assets that the implied volatility of the Black Scholes model varies across exercise price and time-to-maturity and has a pattern known as the volatility smile. In this chapter, we first address the volatility smile using the stochastic volatility models which may underestimate the size of the smile. We then develop an approach to calibrate the smile by choosing the volatility function as a deterministic function of the underlying asset price and time so as to fit the model option price to the observed volatility smile.

Suggested Citation

  • Carl Chiarella & Xue-Zhong He & Christina Sklibosios Nikitopoulos, 2015. "Volatility Smiles," Dynamic Modeling and Econometrics in Economics and Finance, in: Derivative Security Pricing, edition 127, chapter 0, pages 389-401, Springer.
    • Handle: RePEc:spr:dymchp:978-3-662-45906-5_18
    DOI: 10.1007/978-3-662-45906-5_18
    as

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