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Price Deviations of S&P 500 Index Options from the Black-Scholes Formula Follow a Simple Pattern

  • Li, Minqiang

It is known that actual option prices deviate from the Black-Scholes formula using the same volatility for different strikes. For the S&P 500 index options, we find that these deviations follow a stable pattern and are described by a simple function of at-the-money-forward total volatility. This im plies that the term structure of at-the-money-forward volatilities is su±cient to determine the entire volatility surface. We also find that the implied risk-neutral density is bimodal. The patterns we find are useful in predicting future implied volatilities.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11530.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:11530
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