Volatility smile
Market-consistent equity risk premiums
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The capital asset pricing model used to determine excess return for a given risk level and allocate assets typically uses historical data, which can be a poor predictor of risk. Here, Adrian Alscher and...
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Calibrating a local volatility model to options prices is a complicated process requiring both interpolation of liquid prices and extrapolation beyond them. Recently focus has turned to efficient numerical...
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Following our analysis of volatility skew in the January issue, we now turn our attention to when to expect a volatility smile.
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More Volatility smile articles
Volatility has become affordable again, says Deutsche Bank
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Implied volatility and realised volatility should be muted for most equity indexes next year, according to Deutsche Bank.
Trade of the month: Volatility skew
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How does volatility skew affect the pricing of structured products?
Smiling jumps
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Local jump intensity models, in which the volatility of a Lévy process is made spot-dependent, are difficult to parameterise and calculate. However, they are an important ingredient of credit barrier models, in which the firm value is modelled as a geometric...
Sponsored statement: The problems with generally used interpolation...
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In a world increasingly focused on effective enterprise-level risk management, there are notable discrepancies in volatility management techniques. Murex proposes a cross-asset interpolation space with potentially significant risk management impacts
The inflation pricing conundrum
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Fear of a spike in consumer prices has created greater demand for inflation protection from a variety of participants. This has increased the need for inflation pricing and analytics tools – but it is not as simple as tweaking existing models used for...
Expanded smiles
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Implementing models with stochastic as well as deterministic local volatility can be challenging. Here, Jesper Andreasen and Brian Huge describe an expansion approach for such models that avoids the high-dimensional partial differential equations usually...
Putting the smile back on the face of derivatives
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Cross-asset quadratic Gaussian models have been limited in the scale of their implementation by the difficulty in ensuring the correct drift conditions to omit arbitrage. Here, Paul McCloud shows how to exploit the symmetries of the functional form to...
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