haku: @indexterm Stochastic processes / yhteensä: 546
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| Tekijä: | Tompkins, R.G. |
| Otsikko: | Why smiles exist in foreign exchange options markets: Isolating components of the risk neutral process |
| Lehti: | European Journal of Finance
2006 : SEP/OCT, VOL. 12:6-7, p. 583-603 |
| Asiasana: | stochastic processes volatility futures markets options prices risk premium models |
| Kieli: | eng |
| Tiivistelmä: | Foreign exchange (hereafter as: f-exg.) options' (as: opt./opts.) prices systematically diverge from those consistent with several previous opt. pricing (as: prc.) models. This paper examines whether alternative models better explaining the empirical dynamics of the f-exg. futures markets can yield implied volatility (as: vol.) surfaces similar to those observed for opts. on f-exg. futures. The most suitable alternative models include jumps and stochastic (as: stch.) vol. This study aims at gaining a deeper understanding of the properties and especially the order of magnitude of the risk premium which is done by choosing a feasible martingale measure, assuming no market price of jump or stch. vol. risks, and price opts. under this measure. The implied vol. biases from model-based opt. prices are compared to the actual implied vol. surfaces for opts. The systematic and substantive differences found suggest a negative risk premium, which is a relatively more important and universal component in FX opt. prc. than previously reported. |
SCIMA