Abstract
Growing evidences suggest two violations of Black, Scholes (J Polit Econ 81:3, 637–654, 1973) model: the downwards sloping volatility smile across moneyness and the heavy-tailed asset return distribution implied by option prices. Both abnormalities are caused by the existence of rare disasters or tail events in asset returns. Rubinstein (J Financ 49, 771–818, 1994) find that the implied volatility across moneyness becomes skewed since October 1987. This feature is often referred to as “volatility smirk”. On the other hand, (Jackwerth, Rubinstein, J Financ 51, 1161–1631, 1996) show that the option implied probability distribution is more left-skewed and changes from platykurtic to leptokurtic after the market crash in 1987.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
For the purpose of mathematic simplicity, we only examine a special case of the double exponential model of Kou (2002) and Kou and Wang (2004), i.e., the Laplace model, in this chapter.
- 2.
In this study, the inputs of equilibrium interest rate and dividend yield are from the real market observations. According to Liu et al. (2005), this is without much loss of generality.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2018 Xiamen University Press and Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Chen, J. (2018). Jump Size Distributions and Option Pricing. In: General Equilibrium Option Pricing Method: Theoretical and Empirical Study. Springer, Singapore. https://doi.org/10.1007/978-981-10-7428-8_6
Download citation
DOI: https://doi.org/10.1007/978-981-10-7428-8_6
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-10-7427-1
Online ISBN: 978-981-10-7428-8
eBook Packages: Economics and FinanceEconomics and Finance (R0)