Evaluating the Predictability of the Volatility Smile Using Return Distributions

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dc.contributor Svenska handelshögskolan, Institutionen för finansiell ekonomi och ekonomisk statistik, finansiell ekonomi sv
dc.contributor Swedish School of Economics and Business Administration, Department of Finance and Statistics, Finance en
dc.contributor.author Lindqvist, Thomas
dc.contributor.author Söderman, Ronnie
dc.date.accessioned 2011-03-02T13:57:25Z
dc.date.available 2011-03-02T13:57:25Z
dc.date.issued 2000
dc.identifier.isbn 951-555-663-5
dc.identifier.issn 0357-4598
dc.identifier.uri http://hdl.handle.net/10227/141
dc.identifier.uri URN:ISBN:951-555-663-5
dc.description.abstract In this paper, we examine the predictability of observed volatility smiles in three major European index options markets, utilising the historical return distributions of the respective underlying assets. The analysis involves an application of the Black (1976) pricing model adjusted in accordance with the Jarrow-Rudd methodology as proposed in 1982. Thereby we adjust the expected future returns for the third and fourth central moments as these represent deviations from normality in the distributions of observed returns. Thus, they are considered one possible explanation to the existence of the smile. The obtained results indicate that the inclusion of the higher moments in the pricing model to some extent reduces the volatility smile, compared with the unadjusted Black-76 model. However, as the smile is partly a function of supply, demand, and liquidity, and as such intricate to model, this modification does not appear sufficient to fully capture the characteristics of the smile. fi
dc.format.extent 1837 bytes
dc.format.extent 117296 bytes
dc.format.mimetype application/pdf
dc.format.mimetype text/plain
dc.language.iso en
dc.publisher Svenska handelshögskolan sv
dc.publisher Swedish School of Economics and Business Administration en
dc.relation.ispartofseries Working Papers
dc.relation.ispartofseries 438
dc.rights Publikationen är skyddad av upphovsrätten. Den får läsas och skrivas ut för personligt bruk. Användning i kommersiellt syfte är förbjuden. sv
dc.rights This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited. en
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dc.subject non-normality in returns fi
dc.subject skewness fi
dc.subject kurtosis fi
dc.subject option pricing fi
dc.subject volatility smile fi
dc.subject.other Finance fi
dc.title Evaluating the Predictability of the Volatility Smile Using Return Distributions fi
dc.type.dcmitype Text

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