Higher-order volatility

Alexander Carey

MPRA Paper from University Library of Munich, Germany

Abstract: An important purpose of derivatives modelling is to provide practitioners with actionable measures of risk. The Black and Scholes volatility remains a favourite on trading floors in spite of well-known biases. One popular extension is to make volatility a function of time and the underlying asset price, as in local volatility models. This paper presents an alternative extension, which produces volatility-like quantities to address the skews and smiles found in most derivatives markets.

Keywords: higher-order volatility; higher-order moments; volatility smile; S&P 500 (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2005-12-01
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:4993

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