000162568 001__ 162568
000162568 005__ 20180122231256.0
000162568 037__ $$a1744-2016-140956
000162568 041__ $$aen_US
000162568 084__ $$aG13
000162568 084__ $$aG12
000162568 245__ $$aThe Financial Market Consequences of Growing Awareness: The Case of Implied Volatiltiy Skew
000162568 260__ $$c2014-01
000162568 269__ $$a2014-01
000162568 270__ $$mh.siddiqi@uq.edu.au$$pSiddiqi,   Hammad
000162568 300__ $$a35
000162568 336__ $$aWorking or Discussion Paper
000162568 490__ $$aFinance
000162568 490__ $$aF14_1
000162568 520__ $$aThe belief that the essence of the Black Scholes model is correct implies that one is unaware that a delta-hedged portfolio is risky, while believing that the proposition, a delta-hedged portfolio is risk-free, is true. Such partial awareness is equivalent to restricted awareness in which one is unaware of the states in which a delta-hedged portfolio is risky. In the continuous limit, two types of restricted awareness are distinguished. 1) Strongly restricted awareness in which one is unaware of the type of the true stochastic process. 2) Weakly restricted awareness, in which one is aware of the type of the true stochastic process, but is unaware of the true parameter values.  We apply the generalized principle of no-arbitrage (analogy making) to derive alternatives to the Black Scholes model in each case. If the Black Scholes model represents strongly restricted awareness, then the alternative formula is a generalization of Merton’s jump diffusion formula. If the Black Scholes formula represents weakly restricted awareness, then the alternative formula, first derived in Siddiqi(2013), is a generalization of the Black Scholes formula. Both alternatives generate implied volatility skew. Hence, the sudden appearance of the skew after the crash of 1987 can be understood as the consequence of growing awareness, as investors realized that a delta-hedged portfolio is risky after suffering huge losses in their portfolio-insurance delta-hedges. The different implications of strongly restricted awareness vs. weakly restricted awareness for option pricing are discussed.
000162568 542__ $$fLicense granted by Evelyn  Smart (e.smart@uq.edu.au) on 2014-01-20T22:45:37Z (GMT):

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000162568 650__ $$aFinancial Economics
000162568 6531_ $$aPartial Awareness
000162568 6531_ $$aRestricted Awareness
000162568 6531_ $$aBlack Scholes Model
000162568 6531_ $$aAnalogy Making
000162568 6531_ $$aGeneralized Principle of No-Arbitrage
000162568 6531_ $$aImplied Volatility Skew
000162568 6531_ $$aImplied Volatility Smile
000162568 6531_ $$aPortfolio Insurance Delta-Hedge
000162568 700__ $$aSiddiqi, Hammad
000162568 8564_ $$s615374$$uhttp://ageconsearch.umn.edu/record/162568/files/WPF14_1.pdf
000162568 887__ $$ahttp://purl.umn.edu/162568
000162568 909CO $$ooai:ageconsearch.umn.edu:162568$$pGLOBAL_SET
000162568 912__ $$nSubmitted by Evelyn  Smart (e.smart@uq.edu.au) on 2014-01-20T22:48:12Z
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000162568 912__ $$nMade available in DSpace on 2014-01-20T22:48:12Z (GMT). No. of bitstreams: 1
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  Previous issue date: 2014-01
000162568 982__ $$gUniversity of Queensland>School of Economics>Risk and Sustainable Management Group Working Papers
000162568 980__ $$a1744