A copy of this work was available on the public web and has been preserved in the Wayback Machine. The capture dates from 2014; you can also visit the original URL.
The file type is
This paper develops a closed-form solution to an extended Black-Scholes (EBS) pricing formula which admits an implied drift parameter alongside the standard implied volatility. The market volatility smiles for vanilla call options on the S&P 500 index are recreated fitting the best volatility-drift combination in this new EBS. Using a likelihood ratio test, the implied drift parameter is seen to be quite significant in explaining volatility smiles. The implied drift parameter is sufficientlydoi:10.4236/am.2012.36093 fatcat:5xekf2yz4ra5zkws7otn6mfawu