Analogy Making and the Structure of Implied Volatility Skew

Hammad Siddiqi
2013 Social Science Research Network  
An analogy based call option pricing model is put forward. The model provides a new explanation for the implied volatility skew puzzle and is consistent with empirical findings regarding leverage adjusted option returns. It explains puzzling superior performance of covered call writing and worse-than-expected performance of zero-beta straddles. The analogy based stochastic volatility and the analogy jump diffusion models are also developed. The analogy based stochastic volatility model
more » ... the skew even without any correlation between the stock price and volatility processes, whereas, the analogy jump diffusion does not require asymmetric jumps to generate the skew. JEL Classification: G13, G12
doi:10.2139/ssrn.2305314 fatcat:cdhmekqihbepvnte4njonvdczm