Keep on Smiling: Market Imbalance, Option Pricing, and the Volatility Smile
SSRN Electronic Journal
2022
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Example: if you select the 1-year option for an article published in 2019 and a metric category shows 90%, that means that the article or review is performing better than 90% of the other articles/reviews published in that journal in 2019. If you select the 3-year option for the same article published in 2019 and the metric category shows 90%, that means that the article or review is performing better than 90% of the other articles/reviews published in that journal in 2019, 2018 and 2017.
Citation Benchmarking is provided by Scopus and SciVal and is different from the metrics context provided by PlumX Metrics.
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Article Description
The Black-Scholes model, which is widely used to price financial options, assumes that volatility is constant as a function of strike price. However when market option prices are used to infer the volatility that is implied by those prices, it often exhibits a marked dependence on strike price which is characterised by a smile or skew shape. This paper argues that the volatility smile is “real” in the sense that volatility and price change are correlated through the degree of market imbalance. We test a formula for the volatility smile, derived from a quantum oscillator model of stock markets, against historical market data. It is seen that the Black-Scholes model systematically misprices options, but that option pricing performance can be improved by taking the smile into account.
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