We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.
|Number of pages||13|
|Journal||European Journal of Operational Research|
|Publication status||Published - 16 Apr 1999|
- Generalised gamma
- Implied volatility
- Smile effect