The impact of macroeconomic information releases on the smile shape

Hassan Tanha and Michael Dempsey

Review of Behavioral Finance, 2016, vol. 8, issue 1, 80-90

Abstract: Purpose - – The purpose of this paper is to assign fair values to options reduces to the attempt to attribute correct implied volatilities. Here, the authors extend the study by Tanhaet al.(2014) to determine the impact of macro economic announcements on the option smile. Design/methodology/approach - – First, the authors estimate the implied volatility function in terms of moneyness. The authors next analyse the impact of macroeconomic announcements on the estimated coefficients (b0,b1,b2) by regressing the coefficients on the macroeconomic announcements. Findings - – The authors find that in-the-money options are sensitive to such announcements, but that out-of-the money options are not. This is consistent with the interpretation of investor behaviour from prospect theory. Originality/value - – The systematic pricing errors that have been documented using the Black-Scholes model have stimulated attempts to improve the model predictions. The approach uses DVF model to improve the B-S model.

Keywords: Prospect theory; Deterministic volatility function; Volatility smile shape (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:v:8:y:2016:i:1:p:80-90

DOI: 10.1108/RBF-10-2014-0049

Access Statistics for this article

Review of Behavioral Finance is currently edited by Professor Gulnur Muradoglu

More articles in Review of Behavioral Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().