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Analogy Making and the Structure of Implied Volatility Skew

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  • Siddiqi, Hammad

Abstract

An analogy based call option pricing model is put forward. The model provides a new explanation for the implied volatility skew puzzle. The analogy model is consistent with empirical findings about returns from well studied option strategies such as covered call writing and zero-beta straddles. 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.

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  • Siddiqi, Hammad, 2014. "Analogy Making and the Structure of Implied Volatility Skew," MPRA Paper 60921, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60921
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    Cited by:

    1. Siddiqi, Hammad, 2015. "Analogy Based Valuation of Currency Options," MPRA Paper 62333, University Library of Munich, Germany.
    2. O'Callaghan, Patrick, 2015. "Minimal conditions for parametric continuity of a utility representation," Risk and Sustainable Management Group Working Papers 200371, University of Queensland, School of Economics.
    3. Siddiqi, Hammad, 2015. "Analogy Based Valuation of Commodity Options," Risk and Sustainable Management Group Working Papers 197334, University of Queensland, School of Economics.
    4. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call Writing," Risk and Sustainable Management Group Working Papers 199882, University of Queensland, School of Economics.
    5. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call writing," MPRA Paper 62763, University Library of Munich, Germany.
    6. Siddiqi, Hammad, 2015. "Analogy based Valuation of Commodity Options," MPRA Paper 61083, University Library of Munich, Germany.

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    More about this item

    Keywords

    Implied Volatility Skew; Implied Volatility Smile; Analogy Making; Stochastic Volatility; Jump Diffusion; Covered Call Writing; Zero-Beta Straddle;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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