Smile Dynamics -- A Theory of the Implied Leverage Effect

@article{Ciliberti2008SmileD,
  title={Smile Dynamics -- A Theory of the Implied Leverage Effect},
  author={Stefano Ciliberti and Jean-Philippe Bouchaud and Marc Potters},
  journal={Econometric Modeling: Derivatives eJournal},
  year={2008}
}
We correct a mistake in the published version of our paper. Our new conclusion is that the "implied leverage effect" for single stocks is underestimated by option markets for short maturities and overestimated for long maturities, while it is always overestimated for OEX options, except for the shortest maturities where the revised theory and data match perfectly. 
The impact of the leverage effect on the implied volatility smile: evidence for the German option market
It is a widely known theoretical derivation, that the firm’s leverage is negatively related to volatility of stock returns, although the empirical evidence is still outstanding. To empiricallyExpand
SKEW AND IMPLIED LEVERAGE EFFECT: SMILE DYNAMICS REVISITED
We revisit the "Smile Dynamics" problem, which consists in relating the implied leverage (i.e. the correlation of the at-the-money volatility with the returns of the underlying) and the skew of theExpand
Skew and Implied Leverage Effect: Smile Dynamics Revisited
We revisit the "Smile Dynamics" problem, which consists in relating the implied leverage (i.e. the correlation of the at-the-money volatility with the returns of the underlying) and the skew of theExpand
Option Pricing with a Dynamic Fat-Tailed Model
In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing ofExpand
Option pricing with a dynamic fat-tailed model
In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing ofExpand
Option Pricing under Skewness and Kurtosis Using a Cornish Fisher Expansion
This paper revisits the pricing of options, in a context of financial stress, when the underlying asset’s returns displays skewness and excess kurtosis. For that purpose, we use a Cornish-FisherExpand
Option Pricing Under Skewness and Kurtosis Using a Cornish–Fisher Expansion
This paper revisits the pricing of options, in a context of financial stress, when the underlying asset's returns displays skewness and excess kurtosis. For that purpose, we use a Cornish–FisherExpand
On the Joint Dynamics of the Spot and the Implied Volatility Surface
In this paper, we revisit the "Smile Dynamics" problem. In a previous work, Bergomi built a class of linear stochastic volatility models in which he specified the joint dynamics between theExpand
Variance Dynamics - An empirical journey
We investigate the joint dynamics of spot and implied volatility from an empirical perspective. We focus on the equity market with the SPX Index our underlying of choice. Using only observableExpand
Stock/option joint dynamics and application to option trading strategies
This thesis explores theoretically and empirically the implications of the stock/option joint dynamics on applications related to option trading. In the first part of the thesis, we look into theExpand
...
1
2
3
...

References

SHOWING 1-10 OF 28 REFERENCES
Smile Dynamics IV
In this paper we address the relationship between the smile that stochastic volatility models produce and the dynamics they generate for implied volatilities. We introduce a new quantity, which weExpand
Leverage effect in financial markets: the retarded volatility model.
TLDR
This work investigates quantitatively the so-called "leverage effect," which corresponds to a negative correlation between past returns and future volatility, which is moderate and decays over 50 days, while for stock indices it is much stronger but decays faster. Expand
Accounting for Biases in Black-Scholes
Prices of currency options commonly differ from the Black-Scholes formula along two dimensions: implied volatilities vary by strike price (volatility smiles) and maturity (implied volatility ofExpand
The Leverage Effect in Financial Markets: Retarded Volatility And Market Panic
We investigate quantitatively the so-called leverage effect, which corresponds to a negative correlation between past returns and future volatility. For individual stocks, this correlation isExpand
Derivatives in Financial Markets with Stochastic Volatility
1. The Black-Scholes theory of derivative pricing 2. Introduction to stochastic volatility models 3. Scales in mean-reverting stochastic volatility 4. Tools for estimating the rate of mean-reversionExpand
The Local Volatility Surface: Unlocking the Information in Index Option Prices
The structure of listed index options prices, examined through the prism of the implied tree model, reveals the local volatility surface of the underlying index. In the same way as fixed-incomeExpand
Financial markets as adaptive systems
We show, by studying in detail the market prices of options on liquid markets, that the market has empirically corrected the simple, but inadequate Black-Scholes formula to account for two importantExpand
MANAGING SMILE RISK
Market smiles and skews are usually managed by using local volatility models a la Dupire. We discover that the dynamics of the market smile predicted by local vol models is opposite of observedExpand
Volatility surfaces: theory, rules of thumb, and empirical evidence
Implied volatilities are frequently used to quote the prices of options. The implied volatility of a European option on a particular asset as a function of strike price and time to maturity is knownExpand
Pricing with a Smile
prices as a function of volatility. If an option price is given by the market we can invert this relationship to get the implied volatility. If the model were perfect, this implied value would be theExpand
...
1
2
3
...