Analogy Making and the Structure of Implied Volatility Skew

An analogy based option pricing model is put forward. If option prices are determined in accordance with the analogy model, and the Black Scholes model is used to back-out implied volatility, then the implied volatility skew arises, which flattens as time to expiry increases. The analogy based stochastic volatility and the analogy based jump diffusion models are also put forward. The analogy based stochastic volatility model generates the skew even when there is no correlation between the stock price and volatility processes, whereas, the analogy based jump diffusion model does not require asymmetric jumps for generating the skew.


Issue Date:
2014-10
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/187407
PURL Identifier:
http://purl.umn.edu/187407
Total Pages:
40
JEL Codes:
G13; G12
Series Statement:
Finance
WPF14_7




 Record created 2017-04-01, last modified 2018-01-22

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)