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Numerics of Implied Binomial Trees
Härdle, Wolfgang; Mysickova, Alena - Sonderforschungsbereich 649: Ökonomisches Risiko, … - 2008
Market option prices in last 20 years conrmed deviations from the Black and Scholes (BS) models assumptions, especially on the BS implied volatility. Implied binomial trees (IBT) models capture the variations of the implied volatility known as \volatility smile". They provide a discrete...
Persistent link: https://www.econbiz.de/10005677880
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Short and Long Term Smile Effects: The Binomial Normal Mixture Diffusion Model
Alexander, Carol - Henley Business School, University of Reading - 2002
This paper extends the normal mixture diffusion (NMD) local volatility model of Brigo and Mercurio (2000, 2001a,b, 2002) so that it explains both short-term and long-term smile effects. Short-term smile effects are captured by a local volatility model where excess kurtosis in the price density...
Persistent link: https://www.econbiz.de/10005558333
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The Fine Structure of Equity-Index Option Dynamics
Andersen, Torben G.; Bondarenko, Oleg; Todorov, Viktor; … - School of Economics and Management, University of Aarhus - 2013
We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the movements of the volatility surface....
Persistent link: https://www.econbiz.de/10010851229
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Stochastic Volatility
Andersen, Torben G.; Benzoni, Luca - School of Economics and Management, University of Aarhus - 2010
therefore serve as a prominent tool for a wide range of pricing and hedging applications. Moreover, the continuous-time paradigm …
Persistent link: https://www.econbiz.de/10008504200
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Implied Volatility at Expiration
Medvedev, Alexey - 2004
The main result of the paper is a formula for zero time-to-maturity limit of implied volatilities of European options under a broad class of stochastic volatility models. Based on this formula, we propose a closed-form approximation of the implied volatility smile. Numerical examples suggest...
Persistent link: https://www.econbiz.de/10005534183
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Demand-Based Option Pricing
Garleanu, Nicolae Bogdan; Pedersen, Lasse Heje; … - C.E.P.R. Discussion Papers - 2005
We model the demand-pressure effect on prices when options cannot be perfectly hedged. The model shows that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option. Similarly, the demand pressure increases the...
Persistent link: https://www.econbiz.de/10005067592
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Quantile hedging
Föllmer, Hans; Leukert, Peter - 1998
study the question what an investor can do who is unwilling to spend that much, and who is ready to use a hedging strategy …
Persistent link: https://www.econbiz.de/10010309909
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Efficient hedging: Cost versus shortfall risk
Föllmer, Hans; Leukert, Peter - 1999
An investor faced with a contingent claim may eliminate risk by (super-)hedging in a financial market. As this is often …
Persistent link: https://www.econbiz.de/10010310016
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Tractable Hedging: An Implementation of Robust Hedging Strategies
Branger, Nicole; Mahayni, Antje - 2004
This paper provides a theoretical and numerical analysis of robust hedging strategies in diffusion?type models … including stochastic volatility models. A robust hedging strategy avoids any losses as long as the realised volatility stays …
Persistent link: https://www.econbiz.de/10010316082
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Pseudo--Arbitrage - A new Approach to Pricing and Hedging in Incomplete Markets
Sommer, Daniel - University of Bonn, Germany - 1998
We develop a new approach to pricing and hedging contingent claims in incomplete markets. Mimicking as closely as … can derive unique prices and corresponding optimal hedging strategies without invoking specific assumptions on preferences … explicitly taking into account optimal hedging strategies leads to positive market prices of risk for volatility even if the …
Persistent link: https://www.econbiz.de/10004968199