
doi: 10.2139/ssrn.864084
An important purpose of derivatives modelling is to provide practitioners with actionable measures of risk. The Black and Scholes volatility remains a favourite on trading floors in spite of well-known biases. One popular extension is to make volatility a function of time and the underlying asset price, as in local volatility models. This paper presents an alternative extension, which produces volatility-like quantities to address the skews and smiles found in most derivatives markets.
higher-order volatility; higher-order moments; volatility smile; S&P 500, jel: jel:G12, jel: jel:G13
higher-order volatility; higher-order moments; volatility smile; S&P 500, jel: jel:G12, jel: jel:G13
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