Of Smiles and Smirks: A Term-Structure Perspective

Posted: 12 Oct 1999

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Multiple version iconThere are 3 versions of this paper

Abstract

An extensive empirical literature in finance has documented not only the presence of anomalies in the Black-Scholes model, but also the "term-structures" of these anomalies (for instance, the behavior of the volatility smile or of unconditional returns at different maturities). Theoretical efforts in the literature at addressing these anomalies have largely focused on two extensions of the Black-Scholes model: introducing jumps into the return process, and allowing volatility to be stochastic. This paper employs commonly used versions of these two classes of models to examine the extent to which the models are theoretically capable of resolving the observed anomalies. We find that each model exhibits some "term-structure" patterns that are fundamentally inconsistent with those observed in the data. As a consequence, neither class of models constitutes an adequate explanation of the empirical evidence, although stochastic volatility models fare better than jumps in this regard.

JEL Classification: E43, G13

Suggested Citation

Das, Sanjiv Ranjan and Sundaram, Rangarajan K., Of Smiles and Smirks: A Term-Structure Perspective. Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=156319

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

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