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Journal of Banking & Finance
Article . 2015 . Peer-reviewed
License: Elsevier TDM
Data sources: Crossref
SSRN Electronic Journal
Article . 2011 . Peer-reviewed
Data sources: Crossref
SSRN Electronic Journal
Article . 2012 . Peer-reviewed
Data sources: Crossref
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Collateral Smile

Authors: Leippold, Markus; Su, Lujing;

Collateral Smile

Abstract

We analyze the impact of funding costs and margin requirements on index options traded on the CBOE. Assuming differential borrowing and lending rates, we derive no-arbitrage bounds for European options. We show that funding costs and the CBOE’s margin requirements lead to a price increase, which translates into skew and smile patterns for implied volatility curves even under constant volatilities. Empirical tests confirm that our model-implied slopes have significant statistical power in explaining the slopes observed in the market. Hence, at least in part, funding costs and collateral requirements offer an institutional explanation of the volatility smile phenomenon.

Country
Switzerland
Related Organizations
Keywords

2003 Finance, 10003 Department of Finance, 2002 Economics and Econometrics, collateral requirements, funding costs, volatility smile, option pricing, 330 Economics, jel: jel:G01, jel: jel:G12, jel: jel:G13

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    popularity
    This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
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    influence
    This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
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    impulse
    This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
8
Average
Average
Average
Green
bronze