The Black-Scholes option pricing model is used to value a wide range of option contracts. It ofictt prices deep in-the-money and deep cut-of-the-money options inconsistently, a phenomenon tve refer to as a volatility "skew" or "smile. " This article applies an extension of the Black-Scholes model developed by jarrow and Rudd to an investigation of S&P 500 index option prices. Non-normal skewness and kurtosis in option-implied distributions of index returns are found to contribute significantly to the phenomenon of volatility skews.
ASJC Scopus subject areas
- Economics and Econometrics