Volatility Smiles

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 18 in Derivative Security Pricing, 2015, pp 389-401 from Springer

Abstract: Abstract It is commonly observed across many underlying assets that the implied volatility of the Black Scholes model varies across exercise price and time-to-maturity and has a pattern known as the volatility smile. In this chapter, we first address the volatility smile using the stochastic volatility models which may underestimate the size of the smile. We then develop an approach to calibrate the smile by choosing the volatility function as a deterministic function of the underlying asset price and time so as to fit the model option price to the observed volatility smile.

Keywords: Option Price; Stochastic Volatility; Implied Volatility; Strike Price; Stochastic Volatility Model (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_18

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DOI: 10.1007/978-3-662-45906-5_18

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