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n Investment Analysts Journal - Modelling South African single-stock futures option volatility smiles

Volume 2014, Issue 79
  • ISSN : 1029-3523
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Abstract

The process of producing an implied volatility surface in the absence of reliable and frequent trade data is difficult. Bakshi, Kapadia and Madan (2003) detail a methodology for relating an index option smile structure with that of one of its constituents. Here we exploit this work to derive the single-stock option smile as a function of the index smile and a regressed relationship between the two underlying assets. Our non-parametric approach allows the market to estimate where implied volatilities should trade for illiquid derivative contracts away from at-the-money. The derived smile does not admit spread arbitrage.

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/content/invest/2014/79/EJC152893
2014-05-01
2017-01-23

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