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| Main Authors: | , , |
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| Format: | Preprint |
| Published: |
2024
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2402.16509 |
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| _version_ | 1866909532045705216 |
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| author | Chau, Huy N. Nguyen, Duy Nguyen, Thai |
| author_facet | Chau, Huy N. Nguyen, Duy Nguyen, Thai |
| contents | This paper investigates short-term behaviors of implied volatility of derivatives written on indexes in equity markets when the index processes are constructed by using a ranking procedure. Even in simple market settings where stock prices follow geometric Brownian motion dynamics, the ranking mechanism can produce the observed term structure of at-the-money (ATM) implied volatility skew for equity indexes. Our proposed models showcase the ability to reconcile two seemingly contradictory features found in empirical data from equity markets: the long memory of volatilities and the power law of ATM skews. Furthermore, the models allow for the capture of a new phenomenon termed the quasi-blow-up phenomenon. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2402_16509 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | On short-time behavior of implied volatility in a market model with indexes Chau, Huy N. Nguyen, Duy Nguyen, Thai Pricing of Securities This paper investigates short-term behaviors of implied volatility of derivatives written on indexes in equity markets when the index processes are constructed by using a ranking procedure. Even in simple market settings where stock prices follow geometric Brownian motion dynamics, the ranking mechanism can produce the observed term structure of at-the-money (ATM) implied volatility skew for equity indexes. Our proposed models showcase the ability to reconcile two seemingly contradictory features found in empirical data from equity markets: the long memory of volatilities and the power law of ATM skews. Furthermore, the models allow for the capture of a new phenomenon termed the quasi-blow-up phenomenon. |
| title | On short-time behavior of implied volatility in a market model with indexes |
| topic | Pricing of Securities |
| url | https://arxiv.org/abs/2402.16509 |