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Option Pricing with a Dynamic Fat-Tailed Model

Aboura, Sofiane; Valeyre, Sébastien; Wagner, Niklas (2013-03), Option Pricing with a Dynamic Fat-Tailed Model, 62nd Annual Meeting of the Midwest Finance Association - MFA 2013 Annual Meeting, 2013-03, Chicago, United States

Type
Communication / Conférence
External document link
http://dx.doi.org/10.2139/ssrn.2031400
Date
2013-03
Conference title
62nd Annual Meeting of the Midwest Finance Association - MFA 2013 Annual Meeting
Conference date
2013-03
Conference city
Chicago
Conference country
United States
Pages
38 p.
Metadata
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Author(s)
Aboura, Sofiane
Dauphine Recherches en Management [DRM]
Valeyre, Sébastien

Wagner, Niklas
Passau University
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.
Subjects / Keywords
European-style option pricing; volatility smile; risk model
JEL
C13 - Estimation: General
C.C1.C16
G13 - Contingent Pricing; Futures Pricing