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Analogy Making and the Structure of Implied Volatility Skew

Listed author(s):
  • Siddiqi, Hammad

An analogy based call option pricing model is put forward. The model provides a new explanation for the implied volatility skew puzzle. The analogy model is consistent with empirical findings about returns from well studied option strategies such as covered call writing and zero-beta straddles. The analogy based stochastic volatility and the analogy based jump diffusion models are also put forward. The analogy based stochastic volatility model generates the skew even when there is no correlation between the stock price and volatility processes, whereas, the analogy based jump diffusion model does not require asymmetric jumps for generating the skew.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 60921.

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Date of creation: 01 Oct 2014
Handle: RePEc:pra:mprapa:60921
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