FROM THE IMPLIED VOLATILITY SKEW TO A ROBUST CORRECTION TO BLACK-SCHOLES AMERICAN OPTION PRICES
2001 ◽
Vol 04
(04)
◽
pp. 651-675
◽
Keyword(s):
We describe a robust correction to Black-Scholes American derivatives prices that accounts for uncertain and changing market volatility. It exploits the tendency of volatility to cluster, or fast mean-reversion, and is simply calibrated from the observed implied volatility skew. The two-dimensional free-boundary problem for the derivative pricing function under a stochastic volatility model is reduced to a one-dimensional free-boundary problem (the Black-Scholes price) plus the solution of a fixed boundary-value problem. The formal asymptotic calculation that achieves this is presented here. We discuss numerical implementation and analyze the effect of the volatility skew.
1999 ◽
Vol 02
(04)
◽
pp. 409-440
◽
2001 ◽
Vol 04
(01)
◽
pp. 45-89
◽
1998 ◽
Vol 01
(02)
◽
pp. 289-310
◽
Keyword(s):
2016 ◽
Vol 20
(4)
◽
pp. 973-1020
◽
Keyword(s):
2016 ◽
Vol 19
(02)
◽
pp. 1650014
◽