Option pricing with a dynamic fat-tailed model

Sofiane Aboura, Sébastien Valeyre and Niklas Wagner
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Sofiane Aboura: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Niklas Wagner: Passau University - Passau University

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Abstract: In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing of European-style options with various attractive features such as a mixture of heavy-tails and Gaussian distribution along with a leverage effect property. We test the model on FTSE 100 stock index options during the period of January 2008 to June 2009. Our empirical results show that the model adequately fits the volatility smile dynamics particularly during stress periods. Furthermore, we find that the leverage effect form is driven by the sticky-strike rule.

Keywords: European-style option pricing; Volatility smile; Risk model; Derivatives; Option Pricing; Options (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

Published in Journal of derivatives & Hedge Funds, 2014, 20 (3), pp.131-155. ⟨10.1057/jdhf.2014.16⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01531191

DOI: 10.1057/jdhf.2014.16

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