Option pricing with a dynamic fat-tailed model

Aboura, Sofiane; Valeyre, Sébastien; Wagner, Niklas

Aboura, Sofiane; Valeyre, Sébastien; Wagner, Niklas (2014), Option pricing with a dynamic fat-tailed model, Journal of Derivatives & Hedge Funds, 20, 3, p. 131-155. 10.1057/jdhf.2014.16

Type

Article accepté pour publication ou publié

Date

2014-08

Journal name

Journal of Derivatives & Hedge Funds

Volume

Number

Publisher

Palgrave Macmillan

Pages

131-155

Publication identifier

10.1057/jdhf.2014.16

Metadata

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Author(s)

Aboura, Sofiane
Dauphine Recherches en Management [DRM]
Valeyre, Sébastien

Wagner, Niklas
Passau University

Abstract (EN)

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; Derivatives; Option Pricing; Options

JEL

C13 - Estimation: General
C.C1.C16
G13 - Contingent Pricing; Futures Pricing