Abstract
The origin of the volatility smile phenomenon observed in options markets has eluded the financial world for more than two decades. We provide a new explanation of this phenomenon using a microscopic multi-agent description of markets. In our model individual trading behavior is explicitly included and the prices of the options are determined by demand and supply. Our results reproduce the empirical observations in respect to the shape and dynamic properties of the volatility smile, suggesting that this phenomenon is a natural consequence of traders' heterogeneous behavior and expectations about the future.
| Original language | English (US) |
|---|---|
| Article number | 1250050 |
| Journal | Advances in Complex Systems |
| Volume | 15 |
| Issue number | 7 |
| DOIs | |
| State | Published - Oct 2012 |
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Keywords
- Microsimulation
- Options markets
- Volatility smile
ASJC Scopus subject areas
- Control and Systems Engineering
- General
Cite this
Understanding complex dynamics in derivatives finance : Why do options markets smile? / Qiu, G.; Kandhai, D.; Johnson, Neil F; Sloot, P. M A.
In: Advances in Complex Systems, Vol. 15, No. 7, 1250050, 10.2012.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Understanding complex dynamics in derivatives finance
T2 - Why do options markets smile?
AU - Qiu, G.
AU - Kandhai, D.
AU - Johnson, Neil F
AU - Sloot, P. M A
PY - 2012/10
Y1 - 2012/10
N2 - The origin of the volatility smile phenomenon observed in options markets has eluded the financial world for more than two decades. We provide a new explanation of this phenomenon using a microscopic multi-agent description of markets. In our model individual trading behavior is explicitly included and the prices of the options are determined by demand and supply. Our results reproduce the empirical observations in respect to the shape and dynamic properties of the volatility smile, suggesting that this phenomenon is a natural consequence of traders' heterogeneous behavior and expectations about the future.
AB - The origin of the volatility smile phenomenon observed in options markets has eluded the financial world for more than two decades. We provide a new explanation of this phenomenon using a microscopic multi-agent description of markets. In our model individual trading behavior is explicitly included and the prices of the options are determined by demand and supply. Our results reproduce the empirical observations in respect to the shape and dynamic properties of the volatility smile, suggesting that this phenomenon is a natural consequence of traders' heterogeneous behavior and expectations about the future.
KW - Microsimulation
KW - Options markets
KW - Volatility smile
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UR - http://www.scopus.com/inward/citedby.url?scp=84866705416&partnerID=8YFLogxK
U2 - 10.1142/S0219525912500506
DO - 10.1142/S0219525912500506
M3 - Article
VL - 15
JO - Advances in Complex Systems
JF - Advances in Complex Systems
SN - 0219-5259
IS - 7
M1 - 1250050
ER -