Econometrics of Option Pricing
Published Online: 15 MAY 2010
Copyright © 2010 John Wiley & Sons, Ltd. All rights reserved.
Encyclopedia of Quantitative Finance
How to Cite
Renault, E. 2010. Econometrics of Option Pricing. Encyclopedia of Quantitative Finance. .
- Published Online: 15 MAY 2010
The information content of a cross-section of European option prices written on a given stock with a given time to maturity is summarized by the volatility smile. This article discusses how to graph the volatility smile, to interpret its asymmetry, convexity, term structure and time variation. Implied volatility, implied risk aversion, risk neutral valuation, and pricing kernels are discussed in the context of dynamic mixtures of geometric Brownian motions, possibly featuring stochastic volatility, long range dependence in volatility, and Poisson jumps. More general stochastic processes with possibly infinite activity jump processes as well as more data-driven nonparametric approaches are also sketched.
- option pricing;
- volatility smile;
- stochastic volatility;
- pricing kernel;
- geometric Brownian motion;
- risk neutral valuation