Option Pricing with a Dynamic Fat-Tailed Model

38 Pages Posted: 30 Mar 2012 Last revised: 21 Jun 2015

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Sébastien Valeyre

John Locke Investments

Niklas Wagner

Passau University

Date Written: January 31, 2014

Abstract

In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing of European-style options with various attractive features such as a mixture of heavy-tails and Gaussian distribution along with a leverage effect property. We test the model on FTSE 100 stock index options during the period of January 2008 to June 2009. Our empirical results show that the model adequately fits the volatility smile dynamics particularly during stress periods. Furthermore, we find that the leverage effect form is driven by the sticky-strike rule.

Keywords: European-style option pricing, volatility smile, risk model

JEL Classification: C13, C16, G13

Suggested Citation

Aboura, Sofiane and Valeyre, Sébastien and Wagner, Niklas F., Option Pricing with a Dynamic Fat-Tailed Model (January 31, 2014). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2031400 or http://dx.doi.org/10.2139/ssrn.2031400

Sofiane Aboura (Contact Author)

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Sébastien Valeyre

John Locke Investments ( email )

38 Avenue Franklin Roosevelt
Fontainebleau-Avon, 77210
France

Niklas F. Wagner

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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