Analogy Making and the Structure of Implied Volatility Skew

Hammad Siddiqi

No 187407, Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics

Abstract: An analogy based option pricing model is put forward. If option prices are determined in accordance with the analogy model, and the Black Scholes model is used to back-out implied volatility, then the implied volatility skew arises, which flattens as time to expiry increases. The analogy based stochastic volatility and the analogy based jump diffusion models are also put forward. The analogy based stochastic volatility model generates the skew even when there is no correlation between the stock price and volatility processes, whereas, the analogy based jump diffusion model does not require asymmetric jumps for generating the skew.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 40
Date: 2014-10
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://ageconsearch.umn.edu/record/187407/files/WPF14_7.pdf (application/pdf)

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:ags:uqsers:187407

DOI: 10.22004/ag.econ.187407

Access Statistics for this paper

More papers in Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().