Analogy Making and the Structure of Implied Volatility Skew

Hammad Siddiqi ()

MPRA Paper from University Library of Munich, Germany

Abstract: An analogy based call option pricing model is put forward. The model provides a new explanation for the implied volatility skew puzzle. The analogy model is consistent with empirical findings about returns from well studied option strategies such as covered call writing and zero-beta straddles. 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: Implied Volatility Skew; Implied Volatility Smile; Analogy Making; Stochastic Volatility; Jump Diffusion; Covered Call Writing; Zero-Beta Straddle (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2014-10-01
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (6)

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https://mpra.ub.uni-muenchen.de/61794/1/MPRA_paper_61794.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/63133/1/MPRA_paper_63133.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/60968/8/MPRA_paper_60968.pdf revised version (application/pdf)

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