Real-world options: smile and residual risk

Jean-Philippe Bouchaud, Giulia Iori () and Didier Sornette
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Jean-Philippe Bouchaud: Science & Finance, Capital Fund Management
Didier Sornette: UCLA

No 500039, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

Abstract: We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of `fat' tails. An implied volatility `smile' is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging.

JEL-codes: G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-rmg
Date: 1995-09
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Published in Risk Magazine 9 (3), 61-65, (March 1996)

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Persistent link: http://EconPapers.repec.org/RePEc:sfi:sfiwpa:500039

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