Collective behavior and options volatility smile: An agent-based explanation

Yi-Fang Liu, Wei Zhang and Hai-Chuan Xu

Economic Modelling, 2014, vol. 39, issue C, 232-239

Abstract: This paper represents an initial effect to shed light on the determinants of option implied volatility smile from the micro perspective of traders' behavior. We compare the zero intelligence behavior and the collective behavior with the agent-based simulation. We find that the constant implied volatility, which is the assumption of the Black–Scholes model, can be obtained under the environment of the zero intelligence traders; while the smile shape of implied volatility, which is more consistent with the practical option market worldwide, can be explained by traders' collective behavior. Moreover, different degrees of collective behavior are tested to result that with the increasing of collective degree the implied volatility curve becomes steeper.

Keywords: Collective behavior; Implied volatility smile; Agent-based modeling; Option pricing; Artificial financial market (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:39:y:2014:i:c:p:232-239

DOI: 10.1016/j.econmod.2014.03.011

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