For any strictly positive martingale S = e for which X has an analytically tractable characteristic function, we provide an expansion for the implied volatility. This expansion is explicit in the sense that it involves no integrals, but only polynomials in log(K/S0). We illustrate the versatility of our expansion by computing the approximate implied volatility smile in three well-known martinga...

Asymmetric information models are tested using options implied volatility and volume of trade in eight international markets. We explore the relations between the trading break time duration, the quality of public information, the discretion of options liquidity traders to postpone their trades, and the interday and intraday implied volatility and volume of trade in options. Although asymmetric...

This paper presents a comprehensive empirical evaluation of option-implied and returnsbased forecasts of volatility, in which new developments related to the impact on measured volatility of market microstructure noise and random jumps are explicitly taken into account. The option-based component of the analysis also accommodates the concept of model-free implied volatility, such that the forec...

The implied volatility skew has received relatively little attention in the literature on short-term asymptotics for financial models with jumps, despite its importance in model selection and calibration. We rectify this by providing high-order asymptotic expansions for the at-the-money implied volatility skew, under a rich class of stochastic volatility models with independent stable-like jump...

We study pricing under the local volatility. Our research is mainly intended for pedagogical purposes. In the first part of our work we study the local volatility modeling. We derive the local volatility formula in terms of the European call prices and in terms of the market implied volatilities. We propose and calibrate to the DAX option data a functional form for the implied volatility which ...

For asset prices that follow stochastic-volatility diffusions, we use asymptotic methods to investigate the behavior of the local volatilities and Black–Scholes volatilities implied by option prices, and to relate this behavior to the parameters of the stochastic volatility process. We also give applications, including risk-premium-based explanations of the biases in some näıve pricing and hedg...

Lévy processes for the underlying asset are examined. Implied volatility evolution, under each of the considered models, is discussed after calibrating for the Merton jump diffusion (MJD), variance gamma (VG), normal inverse Gaussian (NIG), Carr, Geman, Madan and Yor (CGMY) and the Black and Scholes (B&S) model. Implied volatility is examined for the entire sample period, revealing some curious...

We examine the forecast quality of Chicago Board Options Exchange (CBOE) implied volatility indexes based on the Nasdaq 100 and Standard and Poor’s 100 and 500 stock indexes. We find that the forecast quality of CBOE implied volatilities for the S&P 100 (VXO) and S&P 500 (VIX) has improved since 1995. Implied volatilities for the Nasdaq 100 (VXN) appear to provide even higher quality forecasts ...

This paper presents a joint analysis of the term structure of credit default swap (CDS) spreads and the implied volatility surface. The rapid development of the CDS market has provided convenient products to extract credit risk, and its interaction with equity volatility has been analyzed in many studies. However, in most of them the 5-year credit default swap spread is used to measure credit r...