재무연구 제 권 호 (2007년 4월)
Asian Review of Financial Research, Vol., No..
pp.1657~1676
pp.1657~1676
Volatility smiles and skews under a static no arbitrage extension of the Carr-Geman-Madan valuation of options in incomplete markets
Intae Jeon Department of Mathematics, The Catholic University of Korea.
Cheol-Ung Park Department of Mathematics, The Catholic University of Korea.
Sang-Il Han Department of Mathematics, The Catholic University of Korea.
It is well known that the pattern of implied volatilities in foreign currency options forms a smile shape which is referred to as a volatility smile. On the other hand, the volatility skew is a general pattern of implied volatilities in equity options. In this paper, we consider the Carr-Geman-Madan valuation of options in incomplete markets on which the preference structure of the market participants are reflected. Through a simple continuous static no arbitrage extension, we examine how the smiles and skews are related.
Intae Jeon
Cheol-Ung Park
Sang-Il Han
It is well known that the pattern of implied volatilities in foreign currency options forms a smile shape which is referred to as a volatility smile. On the other hand, the volatility skew is a general pattern of implied volatilities in equity options. In this paper, we consider the Carr-Geman-Madan valuation of options in incomplete markets on which the preference structure of the market participants are reflected. Through a simple continuous static no arbitrage extension, we examine how the smiles and skews are related.
