Implied volatility skews and stock index skewness and kurtosis implied by S&P 500 index option prices

Charles J. Corrado, Tie Su

Research output: Contribution to journalArticle

61 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)8-19
Number of pages12
JournalJournal of Derivatives
Volume4
Issue number4
DOIs
StatePublished - Jun 1 1997

    Fingerprint

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this