PlumX Metrics
SSRN
Embed PlumX Metrics

Keep on Smiling: Market Imbalance, Option Pricing, and the Volatility Smile

SSRN Electronic Journal
2022
  • 0
    Citations
  • 2,047
    Usage
  • 6
    Captures
  • 1
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Usage
    2,047
    • Abstract Views
      1,605
    • Downloads
      442
  • Captures
    6
  • Mentions
    1
    • News Mentions
      1
      • News
        1
  • Ratings
    • Download Rank
      132,963

Most Recent News

Interview – David Orrell

David Orrell is an applied mathematician and writer. He studied at the University of Alberta and obtained his D.Phil. in mathematics from Oxford University. He

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.

Bibliographic Details

David Orrell; Larry Richards

Elsevier BV

financial options; implied volatility; stock markets; quantum economics; quantum finance

Provide Feedback

Have ideas for a new metric? Would you like to see something else here?Let us know