Modeling The Implied Volatility Smile
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The Volatility Smile
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Author : Emanuel Derman
language : en
Publisher: John Wiley & Sons
Release Date : 2016-09-06
The Volatility Smile written by Emanuel Derman and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-09-06 with Business & Economics categories.
The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models The first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.
Modeling The Implied Volatility Smile
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Author : Kim Sundkvist
language : en
Publisher:
Release Date : 2000
Modeling The Implied Volatility Smile written by Kim Sundkvist and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2000 with categories.
The Volatility Surface
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Author : Jim Gatheral
language : en
Publisher: John Wiley & Sons
Release Date : 2011-03-10
The Volatility Surface written by Jim Gatheral and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-03-10 with Business & Economics categories.
Praise for The Volatility Surface "I'm thrilled by the appearance of Jim Gatheral's new book The Volatility Surface. The literature on stochastic volatility is vast, but difficult to penetrate and use. Gatheral's book, by contrast, is accessible and practical. It successfully charts a middle ground between specific examples and general models--achieving remarkable clarity without giving up sophistication, depth, or breadth." --Robert V. Kohn, Professor of Mathematics and Chair, Mathematical Finance Committee, Courant Institute of Mathematical Sciences, New York University "Concise yet comprehensive, equally attentive to both theory and phenomena, this book provides an unsurpassed account of the peculiarities of the implied volatility surface, its consequences for pricing and hedging, and the theories that struggle to explain it." --Emanuel Derman, author of My Life as a Quant "Jim Gatheral is the wiliest practitioner in the business. This very fine book is an outgrowth of the lecture notes prepared for one of the most popular classes at NYU's esteemed Courant Institute. The topics covered are at the forefront of research in mathematical finance and the author's treatment of them is simply the best available in this form." --Peter Carr, PhD, head of Quantitative Financial Research, Bloomberg LP Director of the Masters Program in Mathematical Finance, New York University "Jim Gatheral is an acknowledged master of advanced modeling for derivatives. In The Volatility Surface he reveals the secrets of dealing with the most important but most elusive of financial quantities, volatility." --Paul Wilmott, author and mathematician "As a teacher in the field of mathematical finance, I welcome Jim Gatheral's book as a significant development. Written by a Wall Street practitioner with extensive market and teaching experience, The Volatility Surface gives students access to a level of knowledge on derivatives which was not previously available. I strongly recommend it." --Marco Avellaneda, Director, Division of Mathematical Finance Courant Institute, New York University "Jim Gatheral could not have written a better book." --Bruno Dupire, winner of the 2006 Wilmott Cutting Edge Research Award Quantitative Research, Bloomberg LP
Semiparametric Modeling Of Implied Volatility
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Author : Matthias R. Fengler
language : en
Publisher: Springer Science & Business Media
Release Date : 2005-12-19
Semiparametric Modeling Of Implied Volatility written by Matthias R. Fengler and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005-12-19 with Business & Economics categories.
This book offers recent advances in the theory of implied volatility and refined semiparametric estimation strategies and dimension reduction methods for functional surfaces. The first part is devoted to smile-consistent pricing approaches. The second part covers estimation techniques that are natural candidates to meet the challenges in implied volatility surfaces. Empirical investigations, simulations, and pictures illustrate the concepts.
The Volatility Smile
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Author : Emanuel Derman
language : en
Publisher:
Release Date : 2016
The Volatility Smile written by Emanuel Derman and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with Finance categories.
"The Volatility Smile: An Introduction for Students and Practitioners The Black-Scholes-Merton options model was the greatest innovation of 20th Century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models"--
The Volatility Smile
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Author : Morten Nielsen
language : en
Publisher:
Release Date : 2002
The Volatility Smile written by Morten Nielsen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with categories.
Application Of Stochastic Volatility Models In Option Pricing
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Author : Pascal Debus
language : de
Publisher: GRIN Verlag
Release Date : 2013-09-09
Application Of Stochastic Volatility Models In Option Pricing written by Pascal Debus and has been published by GRIN Verlag this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-09-09 with Business & Economics categories.
Bachelorarbeit aus dem Jahr 2010 im Fachbereich BWL - Investition und Finanzierung, Note: 1,2, EBS Universität für Wirtschaft und Recht, Sprache: Deutsch, Abstract: The Black-Scholes (or Black-Scholes-Merton) Model has become the standard model for the pricing of options and can surely be seen as one of the main reasons for the growth of the derivative market after the model ́s introduction in 1973. As a consequence, the inventors of the model, Robert Merton, Myron Scholes, and without doubt also Fischer Black, if he had not died in 1995, were awarded the Nobel prize for economics in 1997. The model, however, makes some strict assumptions that must hold true for accurate pricing of an option. The most important one is constant volatility, whereas empirical evidence shows that volatility is heteroscedastic. This leads to increased mispricing of options especially in the case of out of the money options as well as to a phenomenon known as volatility smile. As a consequence, researchers introduced various approaches to expand the model by allowing the volatility to be non-constant and to follow a sto-chastic process. It is the objective of this thesis to investigate if the pricing accuracy of the Black-Scholes model can be significantly improved by applying a stochastic volatility model.
An Empirical Distribution Based Option Pricing Model
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Author : Ren-Raw Chen
language : en
Publisher:
Release Date : 2010
An Empirical Distribution Based Option Pricing Model written by Ren-Raw Chen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
The volatility smile that is generated by the Black-Scholes model has been traditionally attributed to an inappropriately assumed return distribution. Previous studies use alternative specifications such as stochastic volatility and jump diffusion models. However, these specifications do not eliminate the smile. Moreover, as documented by Das and Sundaram (1999), the return distributions that are generated by stochastic volatility and jump diffusion models do not match important characteristics of realized returns. We construct an alternative valuation procedure to price Samp;P 500 call options, using a histogram from past Samp;P 500 index daily returns. We find that the implied volatilities that are generated by our model do not exhibit substantial relationship to moneyness levels. Consistent with the absence of the smile, payoffs to holding options are also not related to moneyness levels. We also find that these payoffs are more closely related to our implied volatility measures than to the Black Scholes implied volatility measures. These findings indicate that our model is more appropriate than the Black-Scholes model to value Samp;P 500 call options.
Implied Volatility Functions
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Author : Bernard Dumas
language : en
Publisher:
Release Date : 1996
Implied Volatility Functions written by Bernard Dumas and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1996 with Options (Finance) categories.
Abstract: Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S & P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities.
Stochastic Interest Rates
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Author : Daragh McInerney
language : en
Publisher: Cambridge University Press
Release Date : 2015-08-13
Stochastic Interest Rates written by Daragh McInerney and has been published by Cambridge University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015-08-13 with Business & Economics categories.
Designed for Master's students, this practical text strikes the right balance between mathematical rigour and real-world application.