We explore the reasons why out-of-the-money index puts trade on much higher implied volatilities than out-of-the-money calls. We develop a trading strategy that exploits the skew in implied volatility, and show that it has a simple interpretation. The pay-off to the strategy is identical to that on a swap whose floating leg is equal to the covariation between returns and changes in implied vari...

Using the industry benchmark CreditGrades model to analyze credit default swap (CDS) spreads across a large number of companies during the 2007–09 credit crisis, the authors demonstrate that the performance of the model can be significantly improved by calibrating it with option-implied volatility rather than with historical volatility. Moreover, the advantage of using option-implied volatility...

We revisit the foundational Moment Formula proved by Roger Lee fifteen years ago. show that in absence of arbitrage, if underlying stock price at time T admits finite log-moments E [ | log S q ] $\mathbb {E}[|\log S_T|^q]$ for some positive q, arbitrage-free growth left wing implied volatility smile is less constrained than Lee's bound. The result rationalized a market trading discretely monito...

Machine learning has been a popular option implied volatility pricing approach. It brings good generalization in by avoiding building different models for options. However, it suffers from relatively low prediction accuracy besides model selection issue. In this study, we propose novel hierarchical approach to enhance machine pricing. is designed the ‘learning-hard’ problem and boosts models’ p...

Abstract This work aims at studying the impact of SARS-CoV-2 pandemic on global financial markets. In particular, such is analysed through changes shape implied volatility smile options written several equity indexes and stocks. The function estimated using market-based information liquid applying a semi-parametric smoothing technique that exploits kernel no-arbitrage conditions. Such approach ...

We study here the large-time behaviour of all continuous affine stochastic volatility models (in the sense of [15]) and deduce a closed-form formula for the large-maturity implied volatility smile. Based on refinements of the Gärtner-Ellis theorem on the real line, our proof reveals pathological behaviours of the asymptotic smile. In particular, we show that the condition assumed in [10] under ...