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A New Factor to Explain Implied Volatility Smirk

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  • fajardo, José

Abstract

In this paper 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

  • fajardo, José, 2016. "A New Factor to Explain Implied Volatility Smirk," MPRA Paper 71809, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:71809
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    File URL: https://mpra.ub.uni-muenchen.de/71809/1/MPRA_paper_71809.pdf
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    References listed on IDEAS

    as
    1. Fajardo, José, 2015. "Barrier style contracts under Lévy processes: An alternative approach," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 179-187.
    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 753-778, April.
    3. Fajardo, José & Farias, Aquiles, 2004. "Generalized Hyperbolic Distributions and Brazilian Data," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 24(2), November.
    4. José Fajardo & Ernesto Mordecki, 2014. "Skewness premium with Lévy processes," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1619-1626, September.
    5. 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.
    6. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    7. 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.
    8. JosE Fajardo & Ernesto Mordecki, 2006. "Symmetry and duality in Levy markets," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 219-227.
    9. repec:kap:revdev:v:20:y:2017:i:2:d:10.1007_s11147-016-9127-x is not listed on IDEAS
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    Cited by:

    1. Fajardo, José, 2016. "Power Style Contracts Under Asymmetric Lévy Processes," MPRA Paper 71813, University Library of Munich, Germany.
    2. repec:kap:annfin:v:14:y:2018:i:1:d:10.1007_s10436-017-0303-2 is not listed on IDEAS

    More about this item

    Keywords

    Skewness; Lévy processes; Implied volatility smirk;

    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

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