Economy – Quantitative Finance – Pricing of Securities
Submitted to "Risk Magazine"
We derive a new, exact and transparent expansion for option smiles, which lends itself both to analytical approximation and, perhaps more importantly, to congenial numerical treatments. We show that the skew and the curvature of the smile can be computed as exotic options, for which the Hedged Monte Carlo method is particularly well suited. When applied to options on the S&P index, we find that the skew and the curvature of the smile are very poorly reproduced by the standard Edgeworth (cumulant) expansion. Most notably, the relation between the skew and the skewness is inverted at small and large vols, a feature that none of the model studied so far is able to reproduce. Furthermore, the around-the-money curvature of the smile is found to be very small, in stark contrast with the highly kurtic nature of the returns.
Leo Lorenzo de
We've walked a million miles for one of these smiles does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.If you have personal experience with We've walked a million miles for one of these smiles, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and We've walked a million miles for one of these smiles will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-642416