The Finite Moment Log Stable Process and Option Pricing  

Oleh:

Carr, Peter ; Wu, Liuren

Jenis: Article from Journal - ilmiah internasional
Dalam koleksi: The Journal of Finance (EBSCO) vol. 58 no. 2 (Apr. 2003), page 753-777.
Fulltext: p 753.pdf (301.73KB)

Isi artikel

We document a surprising pattern in S&P 500 option prices.When implied volatilities are graphed against a standard measure ofmoneyness, the implied volatility smirk does not £atten out as maturity increases up to the observable horizon of two years.This behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem (CLT).We develop a parsimonious model which deliberately violates the CLTassumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon. Calibration exercises demonstrate its superior performance against severalwid ely used alternatives.

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