Why is the Index Smile So Steep?

Nicole Branger and Christian Schlag

Review of Finance, 2004, vol. 8, issue 1, 109-127

Abstract: Empirical evidence shows that the implied volatility smiles for index options are significantly steeper than those for individual options. We propose a model setup where we start from the joint dynamics of the stocks and where the index value is a weighted sum of individual stock prices. Then the differences between the index smile and the smiles for individual stocks are entirely determined by the dependence structure among the stocks. We illustrate our idea in a jump-diffusion framework where both the diffusion and the jumps are decomposed into common and idiosyncratic components. Empirical data for options on the German stock index DAX and on Deutsche Bank are used to show that the model can explain the stylized facts on implied volatility smiles.

Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://hdl.handle.net/10.1023/B:EUFI.0000022159.33778.fd (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Journal Article: Why is the Index Smile So Steep? (2004)
Working Paper: Why is the index smile so steep? (2004)
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:oup:revfin:v:8:y:2004:i:1:p:109-127.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Review of Finance is currently edited by Marcin Kacperczyk

More articles in Review of Finance from European Finance Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().