Many of the stylized facts of asset returns are visualized, and summarized in the literature through the volatility skew or smile. The implied volatility skew is constructed by graphing the implied volatilities of a number of option contracts, against their [[moneyness]. The features of the skew are well documented, and include the following:

• A -shaped relationship between the implied volatility and the moneyness level (or the Delta), with a minimum around-the-money. This pattern is mostly encountered today in currency option markets, and in options on individual shares. Index options exhibited this pattern before the crash of 87. This pattern is known as the volatility smile. The volatility smile is often attributed to the leptokurtosis of the underlying asset returns. Microstructure issues can also magnify the smile, since OTM contracts are sometimes illiquid.
• After the crash, implied volatilities of index options seized being symmtric around the money. Implied volatilities tend to be higher for ITM calls/OTM puts, lower for ATM options and even lower for OTM calls/ITM puts. Rather than a smiling pattern, a smirk is encountered. This is referred to as the volatility skew. The skew is attributed to the negative skewness that the leverage effect entails, fears for crashes (since OTM puts that insure against crashes appear to be overpriced), as well as the leptokurtosis.
• The amplitude of the smile is not constant with the time to maturity. Short maturity options tend to exhibit more acute volatility smiles, that tend to die out for long maturity contracts. Of course this has to do with the measure of moneyness that is used. If Delta is used as the moneyness measure, volatility smiles appear to be fairly persistent with maturity.

The figure below gives an observed implied volatility skew.

What links here?

Got a question?

A short note

''To stop bots posting Viagra adverts as comments I have put a password in place. It just reads AEKARA, which you can use to edit the pages on this site. Sorry for any inconvenience but it was getting a real pain.

Comments^(add/edit)

uk5fQc <a href="http://vevfstykomdq.com/">vevfstykomdq</a>, [url=http://fdkzsxfefapu.com/]fdkzsxfefapu[/url], [link=http://fvzwfyvlxbco.com/]fvzwfyvlxbco[/link], http://lyrqbktiizdm.com/