Advances and Applications in Statistics
Volume 6, Issue 1, Pages 111 - 120
(April 2006)
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RANDOM VOLATILITY AND OPTION PRICES WITH THE GENERALIZED STUDENT-t DISTRIBUTION
Mark Fielding (Australia), Fima C. Klebaner (Australia) and Zinoviy Landsman (Israel)
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Abstract: In finance the stock volatility is used for pricing of options and risk management. In this paper we propose the model of random volatility, and study its distribution by using volatility implied by options on stock. For three companies we examine on the Australian Stock Exchange, it is shown to follow the generalized Student- Option prices, along with a smile curve, according to this model are shown to be close to the observed market values. |
Keywords and phrases: implied volatility, Bayesian statistics, Black-Scholes, smile effect. |
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