Fe b 20 04 A Non-Gaussian Option Pricing Model with Skew

@inproceedings{Borland2004FeB2,
  title={Fe b 20 04 A Non-Gaussian Option Pricing Model with Skew},
  author={Lisa Borland and Jean-Philippe Bouchaud},
  year={2004}
}
Closed form option pricing formulae explaining skew and smile are obtained within a parsimonious non-Gaussian framework. We extend the non-Gaussian option pricing model of L. Borland (Quantitative Finance, 2, 415-431, 2002) to include volatility-stock correlations consistent with the leverage effect. A generalized Black-Scholes partial differential equation for this model is obtained, together with closedform approximate solutions for the fair price of a European call option. In certain limits… CONTINUE READING
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