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Option Pricing with a Dynamic Fat-Tailed Model

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Date
2013-03
Link to item file
http://dx.doi.org/10.2139/ssrn.2031400
Dewey
Economie financière
Sujet
European-style option pricing; volatility smile; risk model
JEL code
C.C1.C13; C.C1.C16; G.G1.G13
Conference name
62nd Annual Meeting of the Midwest Finance Association - MFA 2013 Annual Meeting
Conference date
03-2013
Conference city
Chicago
Conference country
United States
URI
https://basepub.dauphine.fr/handle/123456789/13100
Collections
  • DRM : Publications
Metadata
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Author
Aboura, Sofiane
1032 Dauphine Recherches en Management [DRM]
Valeyre, Sébastien
Wagner, Niklas
233373 Passau University
Type
Communication / Conférence
Item number of pages
38 p.
Abstract (FR)
In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing of European-style options with various attractive features such as a mixture of heavy-tails and Gaussian distribution along with a leverage effect property. We test the model on FTSE 100 stock index options during the period of January 2008 to June 2009. Our empirical results show that the model adequately fits the volatility smile dynamics particularly during stress periods. Furthermore, we find that the leverage effect form is driven by the sticky-strike rule.

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