This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage...

A barrier option is a financial derivative which includes an activation (or deactivation) clause within a standard vanilla option. For instance, a copper mining company could secure to sell in at least K dollars each ton of copper during the next year, by buying M European put options. However,...

We study a new class of three-factor affine option pricing models with interdependent volatility dynamics and a stochastic skewness component unrelated to volatility shocks. These properties are useful in order (i) to model a term structure of implied volatility skews more consistent with the...

In reaction to the well-known stylized facts observed in market data for stocks and options, a multitude of option pricing models beyond Black-Scholes (BS) have been developed relaxing the strict BS assumptions. While these models by construction outperform the BS model in terms of fitting...

This study examines both restricted and unrestricted Black-Sholes models, according to Longstaff (1995). Using the Taiwan index options for each day from January 2005 to December 2008, the unrestricted model simultaneously solves the implied index value and implied volatility whereas the...

Empirical studies on quoted options highlight deviations from the theoretical model of Black and Scholes; this is due to different causes, such as assumptions regarding the price dynamics, markets frictions and investors' attitude toward risk. In this contribution, we focus on this latter issue...

This paper considers the problem of European option pricing in the presence of proportional transaction costs when the price of the underlying follows a jump diffusion process. Using an approach that is based on maximization of the expected utility of terminal wealth, we transform the option...

In this paper we derive an easily computed approximation of Rogers and Shi's lower bound for a local volatility jump-diffusion model and then use it to approximate European basket option values. If the local volatility function is time independent then there is a closed-form expression for the...

It has been demonstrated that European option premia computed with a binomial lattice, as first described by Cox, Ross, and Rubinstein (CRR, 1979), do not have a closed-form solution (Georgiadis, 2011). This stems from a lack of hypergeometricity, an artifact of Gosper's algorithm, and naturally...

We consider an option pricing model proposed by, where the implementation of dynamic hedging strategies has a feedback impact on the price process of the underlying asset. We present numerical results showing that the smile and skewness patterns of implied volatility can actually be reproduced...